What to watch out for with Variable Interest Mortgage Rates
Mortgage Interest rates are a hot topic at the moment, with Banks in tough competition with each other to offer the best interest rates to consumers.
We see many low interest fixed rate mortgages but what about variable rates? There are a few different variable rates for example; standard variable rate, tracker variable rate, capped rate etc. but for the purposes of this article I will focus on the standard variable rate.
A standard variable rate is linked to the rates of the European Central Bank (ECB). As a result the lender can increase or decrease interest rates when the ECB rates rise or fall. It is worth noting that the changing of interest rates is strictly at the Lenders discretion and they are not obliged to make changes.
When entering into a Mortgage, you must be aware that you are entering into a legally binding contract with the Lender and therefore the rules of Contract Law apply. As with every Contract you should read each clause carefully and ensure that you fully understand same. In particular you should ensure that you fully understand how the Lender can change interest rates.
Some Mortgage Contracts have express limitation clauses which means that the interest rate can only be altered by the Lender in response to ‘market conditions’. A sample clause could be ‘Rates of Interest are altered in response to market conditions and may change at any time without prior notice and with immediate effect’. What this means is that a Lender can alter the interest rates in response to market conditions and does not have to take into consideration ECB rates.
The term market conditions has been considered in may court cases and it is worth noting that the cost of funding for a Lender can be considered a market condition.
Some mortgages give Lenders complete discretion when it comes to changing variable interest rates. Again these clauses have been considered in a number of Court cases and what the Courts have said is that Lenders cannot set variable interest rates dishonestly, for an improper purpose or unreasonably and that they cannot exercise their discretion in a way that no reasonable Lender acting reasonably would.
We can see that variable interest rates would be more favorable to Banks given the discretion that it affords to them but it is particularly important that consumers fully understand the terms on which the Lender can alter the interest rates prior to entering into the mortgage.
Consumers must remember that the Mortgage is governed by law which includes for example, rules set by the Central Bank, Contract Law and the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995.
Should you have any concerns in relation to your Mortgage you can contact the Financial Services and Pensions Ombudsman or a Solicitor for advice.
At Dillon Solicitors we are experienced with reviewing Loan Offers and also representing clients in actions against Lenders.