Million set for mortgage cashback

MORE than a million homeowners stand to win substantial refunds on their mortgages after a landmark ruling on Wednesday. The Financial Ombudsman said banks and building societies were wrong to offer low-interest mortgages to new customers while forcing existing borrowers to continue paying a higher rate.

Now those who have lost out since new variable interest rates were introduced in March can claim compensation - in some cases running into thousands of pounds.

The variable rate is a bank or building society's standard mortgage rate, which moves in line with the Bank of England's base rate. Borrowers with discounted deals are offered a percentage off the lender's standard variable rate for a fixed period. Those with capped loans are guaranteed that however much the variable rate fluctuates, their mortgage rate will not rise above a certain limit.

Although Wednesday's decision upheld a complaint about HSBC - formerly the Midland Bank - it will affect several leading lenders and is expected to trigger huge payouts. The Ombudsman found that Halifax and Nationwide were guilty of a similar practice. The lenders are appealing against the decision. While 30,000 of HSBC's 300,000 borrowers have deals linked to the old rate, Halifax has more than a million.

Problems started in March, when banks and building societies launched a new standard variable rate for new customers and those free to remortgage.

Borrowers whose discounted deals and capped loans had expired were told they had to remain on the previous higher standard variable rate because that was what they had agreed when they took out the mortgage. Some locked into the higher rate were paying up to 1% more than those on the new rate.

The Consumers' Association said banks were guilty of 'confusion marketing' and urged them to learn from the judgment. Senior policy adviser Mick McAteer said: 'The banks and building societies offering different mortgage rates should look closely at the Ombudsman's decision. We urge them to treat their customers fairly and ensure that everyone benefits from improved deals.

'If applicable to them, customers' accounts should be moved automatically to a new rate without their having to ask for a transfer.

'Consumers get a raw deal when confusion-marketing is rife. It is vital that all customers are kept fully informed about new rates of interest and the implications for their accounts. If a new rate does not apply to all customers, this must be made very clear in marketing and advertising literature.'

Lenders have argued that their profits would be hit if they were forced to put all their customers on to the lower rate. The HSBC denied the new rate had created two classes of customer, and insisted it was a question of two different products. It said: 'The new Home Buyer mortgage complies with CAT - a standard on Charges, Access and Terms introduced by the Government to protect customers. The old one does not.'

If, as expected, the Ombudsman quashes the appeals by Halifax and Nationwide, borrowers affected will be able to reclaim their overpaid interest. But the lenders do not intend to make it easy. Each borrower would have to complain individually and take the dispute to the highest level in the complaints procedure.

If the issue is still not settled, they can bring their argument before the Ombudsman.

HSBC personal banking manager David Mills said: 'The Ombudsman's decision is unfair. It stifles innovation and creativity in the UK banking industry and it acts to customers' detriment.'