Borrowers hit by C&G rate freeze

Cheltenham & Gloucester, Britain's third largest lender, yesterday sent shockwaves through the mortgage industry by suspending its main lending rate in the wake of a financial ombudsman's ruling last week against the Halifax.

The lender, part of the Lloyds TSB group, is withdrawing its 6% C&G variable rate and reverting to its 6.75% standard variable rate, blaming the financial ombudsman for "driving a coach and horses" through its business model. The withdrawal will mean 200,000 of C&G's 1m borrowers will not benefit from a 0.75% cut in their borrowing rate which they had expected.

In March C&G followed Halifax in introducing a new, lower SVR for all customers except those already enjoying a discount off the old SVR. Last week the ombudsman ruled in favour of a Halifax discount borrower who argued he should have been put on the lower rate.

The ruling had far-reaching implications, not only for Halifax but also Nationwide, Abbey National, HSBC and C&G, which all introduced new SVRs in March, and prompted speculation of a multi-million pound bill for transferring discount borrowers to the new rate.

C&G says the cost of awarding existing discount borrowers with the same level of discount off its new SVR makes the rate uneconomic. "It completely changes the economics of what we can offer," said a C&G spokesman.

Halifax is appealing against the ombudsman's ruling, with a decision expected in October. C&G said yesterday that the suspension of its main rate will be lifted if the Halifax succeeds at appeal. The ombudsman service said it was "unlikely" that an appeal would succeed unless evidence came to light or a mistake had been made.

Customers of C&G who have already shifted to the new SVR will be allowed to continue at the 6% rate, but the phased transfer programme, in which C&G is writing to customers on its old SVR, will be suspended.

Other affected lenders were last night studying the C&G move. Halifax is refusing to speculate about its options if it loses the appeal to the ombudsman. "We haven't even considered suspending our new variable rate," it said.

HSBC, which like Halifax has had an adjudication by the ombudsman, said: "The truth is that the discount customers are already getting an extremely good deal. But we are optimistic that the ombudsman will find in our favour on appeal."

Abbey National and Nationwide both expressed surprise at the C&G move. Abbey National believes it is protected from the ombudsman's ruling because it uses the term tracker rather than variable rate one and variable rate two used by Halifax.