Case Notes
Search results
Home loan – fixed rate – interest rate increased between agreement and draw-down – failure to tell borrowers rate would be locked in
Mr and Mrs C wanted a loan to finance their first house purchase. When filling in the loan application form, they told the bank’s loan manager that the purchase would not be settled and the loan would not have to be paid out until about two months later.
Mr and Mrs C had decided that they would prefer a loan with an interest rate fixed for the first five years. When the loan manager told them that the rate was likely to increase shortly, they signed the application immediately, specifying the current interest rate, assuming that this would be the interest rate which they would have to pay on their loan. They believed that they were getting a good deal. The interest rate specified in the loan application was included as the “current rate” in the loan contract which they subsequently signed with the bank. The loan contract also said that the “agreed interest rate” would be the standard five year fixed rate “prevailing at the start of the loan period.”
The purchase was eventually settled, and the bank paid out their loan. About three months later, when Mr and Mrs C’s first loan statement arrived, they noticed that the interest rate was 0.5% higher than the amount shown in the loan contract they had signed.
When they enquired at the bank, they were told that the loan contract included a clause stipulating that the loan interest would be charged at the bank’s standard fixed rate prevailing when the loan was paid out. As the standard rate for a five year fixed rate loan had increased in the period between the signing of the loan document and the payment of the loan, they were being charged the higher interest rate which applied when the loan was actually paid out. The bank also said that an optional facility was available to its customers that would fix the interest rate for a limited period between the approval and the payment of a loan. The bank said that Mr and Mrs C had chosen not to take up this option.
Mr and Mrs C were certain that the bank had not told them about this facility, and asked the Banking Ombudsman to investigate their complaint. As part of the investigation, a check was made of the bank’s normal policy about the availability of an option to fix the interest rate for a limited period between the signing of a loan document and the payment of the loan. Although the bank has a standard letter advising customers of this interim facility, we could find no evidence that it had been communicated to Mr and Mrs C in any way. It also seemed likely that the facility had not been discussed at their meeting with the loan manager, since a subsequent note on their file indicated they had not been offered the opportunity to “lock in the rate”.
Given my finding that the bank’s normal procedure in relation to the provision of an interim loan facility had not been followed in this case, the bank agreed to reinstate the original lower interest rate for the remainder of the five year fixed rate period, and to credit the loan account with an amount equivalent to the additional interest rate paid so far. The matter was settled on that basis.