There is a lot of talk about tracker differentials in the market place at the moment.
For the uninitiated and, given the circumstances, fortunate amongst you, these differentials are the difference between an established reference rate (usually the Bank of England Base Rate or LIBOR) and your product’s rate of interest. For example Bank of England Base Rate + 0.95 per cent.
Differentials are not usually a controversial topic of conversation and generally only create debate when borrowers are trying to decide whether to accept a fixed rate or risk taking their chances with a variable mortgage.
However, this has all changed in recent months as first the Bank of Ireland and then West Bromwich Mortgage Company Limited announced large increases in the differential connected to existing buy-to-let loans. Unsurprisingly this has led to consternation, anger and disbelief within the landlord community, particularly as many of these loans were labelled ‘life-time trackers’ or indicated that their differentials or premiums would remain unchanged for the lifetime of the loan.
The NLA has been as dismayed, and frankly disgusted, at the behaviour of these lenders, especially where loyal borrowers have been treated with such open distain by financial institutions with which they have a long history of custom. Understandably, many of our members affected by these changes have looked to us to explain what is happening and for advice on how to deal with the impact.
Although the issue is complex, the explanation is relatively simple. Lenders did not expect the Bank of England to reduce its rate to 0.5 per cent or to hold it there for such a long period of time. Doing so has forced down their tracker rates and therefore their income. As a result they are enacting terms and conditions which allow them to increase their differentials to compensate on the basis that the low base rate is an unexpected economic condition and/or it has the potential to harm their ability to continue to operate.
Whether this is ‘fair’ or even legal is another question, but contractually they are permitted to act in this way.
What landlords should do is much trickier. There are those advocating direct legal action, which may or may not succeed. What is certain is that it will be very costly, perhaps more costly than the potential savings in the long-run but this is an assessment for individuals to make based on their circumstances.
Aside from legal action, landlords need to complain directly to their lenders and read their terms and conditions thoroughly. The two banks involved to date are both required, by their own terms and the restrictions of fair contract legislation, to waive certain fees associated with moving between products or repaying loans early. If you are in a position to do so then it is certainly worth shopping around for a better rate and demonstrating that customers will vote with their feet and leave those banks failing to show borrows the respect they deserve.
The NLA is speaking with the regulators and government about the changes and their potential impact. However, it must be noted that as buy-to-let is unregulated, the Financial Conduct Authority does not have a remit to intervene substantially into the terms of these loans – although it looks as though this episode has re-kindled their interest in expanding that remit.
We are working on a case to present to the Office of Fair Trading, arguing that the terms used by these lenders are unfair and therefore unenforceable. We are hopeful that this will eventually bear fruit, but the process is likely to be long and does not guarantee success.
To help us to build as comprehensive a case as possible I would ask that any landlord effected by either of these cases (or any other not mentioned) who has copies of their terms and conditions, offer letters or marketing material, email them to firstname.lastname@example.org or send photocopies to the NLA. These will of course be treated in complete confidence.