Mortgage rise gaffe sees bank pay customers £500 million

Published on Monday 21 February 2011 16:51

BANK of Scotland owner Lloyds is to pay out £500 million in compensation payments after failing to tell hundreds of thousands of customers of a potential rise in mortgage costs.

The taxpayer-backed group revealed yesterday that it had agreed with the City watchdog to make redress payments to 300,000 customers with Halifax, its mortgage arm, who were making higher mortgage repayments than they had been led to expect because of confusing wording in their contracts.

The issue emerged after a number customers complained about an unexpected increase in mortgage payments. The compensation payments were agreed voluntarily with the Financial Services Authority.

The 300,000 people in line for compensation were among 600,000 borrowers who took out Halifax home loans between September 2004 and September 2007 and still held the mortgage in January 2009.

Those affected had moved onto the lender's standard variable rate mortgage (SVR) once their fixed or tracker rate mortgage expired.

The figure includes Halifax mortgages sold in Bank of Scotland branches, but the group could not give a figure for the number of Scots set for redress.

The problem came to light after a series of interest rate cuts in late 2008 and early 2009, culminating in a record low of 0.5 per cent that remains in place, resulted in millions of borrowers on variable rate mortgages seeing their repayments plunge.

Some lenders had caps in place guaranteeing that borrowers would not have to pay more than a certain margin above the Bank base rate.

The Halifax product was capped at 2 per cent above the Bank of England base rate, until the margin was widened to 3 per cent in October 2008.

However, the lender said yesterday that confusing wording in its mortgage documents had given some borrowers the impression that the rise in the margin would not affect them because they were covered by the 2 per cent cap. Lloyds said the Halifax mortgage offer had failed to make it clear to borrowers that it had the right to increase its SVR.

Borrowers who were locked into the mortgage because of early repayment charges, but saw their rate increase when the cap was lifted, will now get goodwill payments of 250 each.

Others will get a refund of the difference between paying 2.5 per cent interest for their mortgage and 3.5 per cent for the time period they were paying.The compensation for those borrowers will range from single figures to the thousands, depending on their mortgage deal.

Lloyds, revealing its 2010 results later this week, said: "The group is committed to running its business with the highest levels of integrity and treating its customers fairly, and therefore believes that a proactive co- ordinated programme to identify affected customers and make goodwill payments is the appropriate course of action."

Another Scotland-based lender, Clydesdale Bank, last summer revealed that 18,000 borrowers on variable-rate mortgages, including 10,000 Scots, had underpaid an average of 800 and would need to make up the shortfall.

Some Clydesdale customers who have complained to the bank or to the Financial Ombudsman Service have succeeded in getting their arrears written off.