Banks prepare for legal battle as era of the free mortgage approaches

With economists predicting that the Bank of England will cut interest rates to 1% tomorrow, the UK banks are preparing for a legal battle since such a reduction could mean that they become indebted to borrowers.

Following weeks of speculation among the legal profession, with the Bank of England expected to reduce the current base rate of 1.5% by 0.5%, the era of the free mortgage looks set to materialise for those homeowners with interest-only mortgages.

If the rate cut forecast comes to fruition, then over 1,000 Cheltenham & Gloucester (C&G) customers with a tracker mortgage of 1.01 percentage points below the Bank of England base rate would be faced with the prospect of 'paying' negative interest.

Eddie Goldsmith of property law firm Goldsmith Williams advises all households with tracker deals check their terms and conditions because they could find themselves in the situation where their lender owes them money. Over the next few weeks, Mr. Goldsmith expects banks to be inundated will borrower telephone calls, with the matter being taken up with the Financial Services Ombudsman.

While most homeowners who are on a tracker mortgage pay the Bank of England base rate plus a percentage on top, the C&G deal has enabled borrowers to pay the base rate minus a percentage, and there was no 'collar' put in place to set a limit on how far the rate can fall.

The lender confirmed that it would charge a rate of 0.001% until its computers are changed because they are currently unable to process zero rates. The company was also insistent that it would not pay borrowers to have a mortgage.

However, lenders have come under criticism for freely providing such mortgage deals prior to the credit crunch to drum up business. Ray Boulger of mortgage brokers John Charcol said that just because circumstances have changed, lenders should not be permitted to break contracts simply because it is no longer in their interests to abide by them.

He added that, instead of actually paying borrowers, lenders should credit customers' mortgage accounts with any negative interest, which would then act as an overpayment and help to cut down the remaining amount the homeowner owed on their house.

A spokesman for the British Bankers Association said that it was irrational to imagine getting paid for borrowing money and that it is important for customers not to be confused by speculation. He confirmed that many borrowers are already enjoying "some of the lowest borrowing rates in history."

Source: Telegraph.co.uk | Last updated: 4th February 2009

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