Bank of Ireland increase differential on tracker rates

I had read the article and the information is conflicting – has Simon Pugh said its unlawful on Buy to let only? and can someone with a Residential mortgage have a refund too ? I would like my 10 ,000 difference paid back ! am going to contact him for clarification.

I have asked Simon Pugh for a copy of the ruling

Reply to the comment left by “MADOONA G” at “08/08/2015 – 19:46“:

Madoona G,

Have you got any clarification yet?

I have rung up the ombudsman and apparently this ruling does not apply. I don’t get it . Can anyone throw any light on it?

K822x
complaint
Mr and Mrs J complain that The Governor and Company of the Bank of Ireland increased
the interest rate on their residential mortgage. They say this is unfair.
background
Mr and Mrs J have a mortgage with Bank of Ireland. In 2002, they ported their previous
mortgage to a new property and also borrowed an additional amount. This meant that they
had two mortgage sub-accounts.
What I shall call “the original loan” was for £90,000 and was at a capped interest rate until
2003, when it reverted to the bank’s standard variable rate. In 2004, Mr and Mrs J took a
new interest rate product which tracked the Bank of England base rate plus 0.69%. This
meant the interest rate was the same as the base rate, plus an additional amount. The
additional amount is called the differential, or margin.
The “further borrowing” taken out in 2002 was for £275,000 and was taken out as a tracker
interest rate which tracked the Bank of England base rate plus a differential of 1%.
In 2013, the bank wrote to Mr and Mrs J to tell them it was increasing the differential to
2.49% from 1 May 2013 and then to 3.99% from 1 October 2013. It said the terms and
conditions of the mortgage allowed it to do this. This had the effect of increasing the
differentials on both parts of the mortgage.
Mr and Mrs J say this isn’t fair.
Our adjudicator said:
 The terms and conditions said that the bank could change the differential for certain
reasons. The bank told Mr and Mrs J about the changes.
 The bank had shown that its funding costs had gone up compared to the interest rate it
was charging on these mortgages. It had also shown that its capital requirements had
changed.
 The bank needed to increase the differential to “maintain a prudent level of profitability
and reserves”. So it was reasonable for the bank to change the differential, and it had a
valid reason to do so.
 The way the bank applied the increase wasn’t unreasonable or unfair.
 The bank has agreed to waive the mortgage exit administration fee (MEAF) it would
usually apply. This was a fair offer and would remove any barriers stopping Mr and Mrs J
repaying the mortgage.
Mr and Mrs J didn’t accept what the adjudicator said and asked for their complaint to be
looked at by an ombudsman. They said that they hadn’t seen the mortgage terms and
conditions and that the paperwork they had didn’t contain the power to vary the differential.
I reviewed the case and came to the conclusion that the bank did have the power in respect
of part of the loan. But in respect of another part, it didn’t. I therefore proposed to uphold the
Ref: DRN9601308
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complaint in part. So I issued a provisional decision to allow both Mr and Mrs J and the bank
to respond before I finalised my decision.
my provisional decision
In my provisional decision, I said:
I have considered all the available evidence and arguments to decide what is fair and
reasonable in the circumstances of this complaint. Having done so, I have come to
different conclusions in respect of the two parts of Mr and Mrs J’s mortgage, and so
will deal with each in turn.
the further borrowing
The further borrowing was agreed by the bank in an offer dated 10 May 2002, and it
is the terms of that offer that govern this part of Mr and Mrs J’s mortgage. In respect
of this part of the mortgage, I agree with the adjudicator that the bank had the power
to act in the way that it did, and that it acted fairly in doing so, for reasons I shall
explain.
Increasing the differential was an unusual move by the bank. I can understand why it
could be seen to be unfair. So we’ve very carefully looked at whether the bank has
acted fairly and reasonably. We’ve also taken into account the protection offered by
the Unfair Terms in Consumer Contracts Regulations 1999.
did the bank tell Mr and Mrs J that it might increase the differential?
I’m satisfied that the bank took reasonable steps to tell Mr and Mrs J that it could
change the differential. It said that it might do so on page three of the offer of further
borrowing that Mr and Mrs J accepted. It said that it could do so in accordance with
the mortgage terms and conditions.
Mr and Mrs J say that they didn’t receive the terms and conditions. The bank says
that it would have provided them at the time. Mr and Mrs J signed the mortgage offer,
and signed to say that they accepted the terms and conditions. I think it likely that
they were provided with a copy of them at the time. Even if they weren’t, they could –
and should – have asked to see one. And I’m afraid that I don’t accept that signing a
contract without reading the terms means that it isn’t fair for it to be binding.
did the bank act in the way it said it would? And did it have a valid reason to increase
the differential?
I think it did. I say this because:
 The mortgage offer said the differential could be changed under condition 6(m) of
the terms and conditions.
 Condition 6(m) said the differential could be changed by giving 30 days’ notice,
unless the offer said something different. It went on to say that other conditions
applied, including condition 6(q).
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 Condition 6(q) said that the bank could increase the differential for a number of
reasons, including those set out in condition 6(t).
 One of the reasons in condition 6(t) was if the bank needed “to increase the
amount we receive from borrowers in order to maintain a prudent level of
profitability or reserves.”
The bank said it was increasing the differential to “maintain a prudent level of
profitability and reserves”. It said that its funding costs had gone up compared to the
interest rates on these mortgages. It also said that it had to hold more capital.
The bank has given us details of its financial position. We’ve looked carefully at this
information. I’ve also taken account of the old and new rules the bank has to follow.
I’m satisfied that the bank’s funding costs had gone up relative to the interest rates
on these mortgages. I’m also satisfied that the capital requirements placed on the
bank had changed – meaning it needed to hold more capital.
After careful thought and on balance, I’m satisfied there was a need for the bank to
increase the differential to “maintain a prudent level of profitability and reserves”. So
it was reasonable for it to increase the differential, and there was a valid reason to do
so which was set out in the contract.
did the bank act fairly and reasonably?
The bank hasn’t applied this increase to all of its customers. Some of them don’t
have the necessary term in their contracts. I can see how it could appear that some
borrowers are paying more than others to make up the money the bank says it needs
to raise on its tracker mortgages. For the increase to be fair, it shouldn’t go further
than it needs to for affected customers.
We’ve looked at whether the bank needed to increase the rate by the amount it did. It
says it needed to increase the rate to make the mortgages profitable – and it has
given us evidence to show this. The new interest rate isn’t out of line with other rates
available. I also know that the bank has put up interest rates for some other
customers.
I’ve already found that the bank needed to make an increase. With that in mind, I
think the bank’s actions were reasonable. I haven’t seen anything to suggest that the
bank increased the rate to try to make an unfair profit – and the evidence we have
suggests it hasn’t gone further than it needs to.
the original loan
The original loan was ported in 2002, and was subject to a rate switch in January
2004. It is the January 2004 rate transfer that contains the most recent terms
applicable to this part of the mortgage which set out how interest is to be calculated.
Clause 10 of the rate transfer terms and conditions, on page 3 of the offer, is headed
“BASE RATE TRACKER SPECIAL CONDITION”. It says:
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“B) Unless otherwise provided for in the promotional rate as shown on the first
page of this form, the interest rate we charge will track the base rate for the
whole mortgage period.
This means that:
(i) Unless we change the differential under paragraph C) or D) below we
will only change the interest rate if the base rate changes
…
D) After the guarantee period, we may change the differential at any time by
giving you written notice. We will only increase the differential under this
paragraph if one or more of the reasons specified in condition 6(f) of our
Residential Mortgage Conditions applies.”
C is not relevant, because it is a power to vary the rate during the guarantee period,
which expired on 31 December 2006.
So, after 31 December 2006, the interest rate differential can only be increased for
one of the reasons specified in condition 6(f) of the Residential Mortgage Conditions.
Condition 6(f) comes under the heading “Charging interest at a variable rate” and
says:
“We may change the variable rate:
 by changing the standard variable rate; or
 (if the offer or any subsequent agreement so provides) by changing any
premium or discount rate which we add to or subtract from the standard
variable rate to arrive at the variable rate.”
The original loan was not on the standard variable rate. Nor was the interest rate on it
calculated by adding a premium to, or subtracting a discount from, the standard
variable rate.
Condition 6(f) does not contain any reasons by reference to which the differential on
a tracker rate can be changed. There is a separate section of the conditions headed
“Changing interest at a tracker rate”, and it is under that section that conditions 6(m),
6(q) and 6(t) fall (I referred to those conditions above, in dealing with the further
borrowing).
The effect of this is that the rate transfer says that the tracker rate differential can
only be increased if one of the reasons specified in condition 6(f) applies. There are
no reasons in 6(f) by which the tracker rate differential can be increased. So the
tracker rate differential cannot, on a strict reading of the contract governing this part
of the mortgage, be increased at all.
Bank of Ireland says that the reference to clause 6(f) is incorrect. It should have said
6(t). But it says that, notwithstanding that error, Mr and Mrs J were plainly told that
the tracker differential could be increased in certain circumstances, and that those
circumstances were described in clause 6 of the terms and conditions. Had they read
all of clause 6, they would have seen clause 6(t) and understood the reasons for
which the differential could be increased. Mr and Mrs J were also – or should have
been – aware of the bank’s right to change the differential because the other part of
the loan, and the previous agreement governing this part of the loan, referred to the
correct condition.
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Mr and Mrs J were thus put on enquiry, should have read the full clause, and so it
would be fair and reasonable to conclude that the bank was entitled to raise the
differential. The bank says that a full reading of clause 6 shows the circumstances in
which the differential can be changed. The rate transfer agreement clearly indicated
that there were some circumstances in which the differential could be increased, and
Mr and Mrs J were aware of the base rate tracker policy.
I have carefully considered what Bank of Ireland has said in this regard. But I’m
afraid I don’t agree. I think that the contract governing this part of the loan is quite
clear. The tracker differential could be increased in certain circumstances. But, after
the guarantee period, that would only be possible for a reason specified in 6(f). The
bank’s reasons for doing so are not specified in 6(f). They therefore cannot be relied
on to justify an increase in the tracker differential.
I accept that the reference to 6(f) is an error in the drafting of the contract. I think that
error gives the contract a clear meaning, albeit a different one to that which Bank of
Ireland intended.
But even if the existence of that error renders the contract ambiguous, I would
resolve that ambiguity in favour of Mr and Mrs J. They are consumers, and there is
an imbalance of bargaining power. The ability unilaterally to vary the price of the
contract is an onerous term, and any ambiguity about it should be resolved in favour
of the consumer.
The logic of the bank’s position is that the contract was wrong, but also that
Mr and Mrs J should have realised it was wrong, worked out where it was wrong and
what it should have said, and then understood and agreed to what the bank meant
(rather than what it said). I don’t consider it fair and reasonable for Bank of Ireland to
expect that.
It follows that I don’t consider Bank of Ireland had the power to vary the differential on
this part of the mortgage. Nor do I consider that, in the circumstances, it was fair and
reasonable for it to do so on this part of the mortgage. And so it should reverse the
effect of the increase and re-work the account as if it had never been implemented.
This will result in an overpayment to this part of Mr and Mrs J’s mortgage. That could
be used to reduce the capital balance of their mortgage. Or it could be refunded to
Mr and Mrs J. I would ask them to let me know, when they respond to this provisional
decision, which option they would prefer. If they prefer the overpayments to be
refunded to them, Bank of Ireland should add simple interest of 8%.
conclusions
I’ve found:
In respect of the further borrowing:
 the bank said at the start that it could change the differential;
 the bank had valid reasons to make the change;
 those reasons were in the mortgage terms and conditions; and
 the amount of the increase wasn’t unreasonable.
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But the bank shouldn’t have put any barriers in Mr and Mrs J’s way if they wished to
move the mortgage. The bank has now agreed to waive the MEAF. In the
circumstances of this case, I think this is a fair and reasonable way to resolve this
part of the complaint.
In respect of the original loan:
 the bank did not have the power to change the differential;
 it wasn’t fair and reasonable for it to have done so.
It should therefore re-work the account as if the increase had not happened, and
either refund the overpayments to Mr and Mrs J or apply them to reduce the capital
balance on this part of the mortgage.
the responses to my provisional decision
Bank of Ireland accepted my provisional decision. Mr and Mrs J accepted my decision in
respect of the original loan and asked to be given copies of the loan documents in respect of
the further borrowing.
my findings
I have reconsidered all the available evidence and arguments to decide what is fair and
reasonable in the circumstances of this complaint. I have also considered again my
provisional decision and the responses to it. Having done so, I see no reason to depart from
it in making my final decision.
final decision
For the reasons I have given, my final decision is that I uphold this complaint in part, and
direct The Governor and Company of the Bank of Ireland to:
 re-work the original borrowing part of the mortgage account so that it is as if the
differential increase had not happened;
 either use the resulting overpayments to reduce the balance on this part of the loan,
or refund them (together with simple interest of 8% per year, running from the date of
each payment to date of settlement) to Mr and Mrs J, at their election.
In addition, if Mr and Mrs J transfer their mortgage to another lender within six months of the
date of my final decision, The Governor and Company of the Bank of Ireland should waive
any mortgage exit administration fee it would have applied.
Under the rules of the Financial Ombudsman Service, I am required to ask Mr and Mrs J to
accept or reject my decision before 20 July 2015.
Simon Pugh
ombudsman
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Ref: DRN9601308

Thank you for your email. The decision you refer to is available on our website at http://www.ombudsman-decisions.org.uk/. If you enter DRN9601308 into the search box it should be the only result returned. I’m afraid I won’t be able to comment on the case beyond what is contained in the decision.
Yours sincerely
Simon Pugh

Its as above David Watson has posted the full reply available as PDF if you follow the instuctions

My view is that we should all check whether our mortgage offer letters included signing to confirm receipt of T&Cs. I expect this is standard and we all will have done.

Secondly hopefully all T&Cs were badly drafted meaning clause 6(f) does not provide for instances where BofI or predecessor can change variable.

This is the relevant bit:

Mr and Mrs J were thus put on enquiry, should have read the full clause, and so it
would be fair and reasonable to conclude that the bank was entitled to raise the
differential. The bank says that a full reading of clause 6 shows the circumstances in
which the differential can be changed. The rate transfer agreement clearly indicated
that there were some circumstances in which the differential could be increased, and
Mr and Mrs J were aware of the base rate tracker policy.
I have carefully considered what Bank of Ireland has said in this regard. But I’m
afraid I don’t agree. I think that the contract governing this part of the loan is quite
clear. The tracker differential could be increased in certain circumstances. But, after
the guarantee period, that would only be possible for a reason specified in 6(f). The
bank’s reasons for doing so are not specified in 6(f). They therefore cannot be relied
on to justify an increase in the tracker differential.
I accept that the reference to 6(f) is an error in the drafting of the contract. I think that
error gives the contract a clear meaning, albeit a different one to that which Bank of
Ireland intended.
But even if the existence of that error renders the contract ambiguous, I would
resolve that ambiguity in favour of Mr and Mrs J. They are consumers, and there is
an imbalance of bargaining power. The ability unilaterally to vary the price of the
contract is an onerous term, and any ambiguity about it should be resolved in favour
of the consumer.
The logic of the bank’s position is that the contract was wrong, but also that
Mr and Mrs J should have realised it was wrong, worked out where it was wrong and
what it should have said, and then understood and agreed to what the bank meant
(rather than what it said). I don’t consider it fair and reasonable for Bank of Ireland to
expect that.
It follows that I don’t consider Bank of Ireland had the power to vary the differential on
this part of the mortgage. Nor do I consider that, in the circumstances, it was fair and
reasonable for it to do so on this part of the mortgage. And so it should reverse the
effect of the increase and re-work the account as if it had never been implemented.

David – I cant find 6f – BOI seems to have had different Mortgage T and C s but mortgage conditions 2002 unfortunately seems to cover the change in differential. Confusingly i have General offer conditions 2003 – but i dont have Residential Mortgage Conditions. that they refer to . we were not properly informed by broker or solicitor i never spoke to my solicitor- she was sacked shortly after i took my mortgage I will never know what happened there? I have a G9 and G7 products whatever that may mean and the FOS final decision on me am bound by Mortgage conditions 2002 .

To say its not confusing is an understatement,

It’s not an issue that they cover change in differential it appears it’s whether it accurately and correctly refers to instances where they may change the differential. My interpretation of the ‘Simon Pugh ruling’ is that the clauses cross referenced for differential change were badly drafted. Can you upload the text to this forum? I shredded my T&Cs long ago and didn’t read the fine print.

The signature section in my contract refers to a number of documents but it does not refer to the T’s & C’s. Part of my presentation to the Ombudsmen was that signing the contract did not include signing or agreeing to the terms and conditions. Along with other arguments, that point was ignored.