Halifax faces refund bill

Halifax faces a bill of tens of millions of pounds after the financial ombudsman ruled that it should have offered existing borrowers cheaper mortgages after it lowered rates for certain customers.

At issue is the decision by Halifax and other lenders to bring in new, lower standard variable mortgage rates but to forbid some existing customers from taking advantage, insisting they stay tied to the "old" standard rates.

The test case was brought by Chris Wright, a Halifax borrower for 31 years, who argued he should not have been kept on the higher rate and should have been put on the lower one.

An adjudicator at the ombudsman service, the complaints-handling body, has ruled that the bank should refund "overpayments" made by Mr Wright since March 1 - estimated at about £250 - and pay him £150 for the inconvenience he has suffered.

It is unclear how many other people could successfully claim against Halifax but experts say it is likely to be more than 500,000. The ombudsman said the decision had "far-reaching implications".

Many in the financial services industry say the test case ruling - details of which were revealed yesterday - could also lead to payouts to borrowers with other major lenders such as Abbey National, Nationwide and HSBC, which have made similar changes to the way many existing borrowers are treated.

Halifax has appealed against the ruling but the ombudsman service said it was "unlikely" to succeed unless fresh evidence came to light or a mistake had been made. If the decision is upheld, it is highly likely that it will also apply to the 40-odd similar cases involving Halifax which the ombudsman has received, and any others that come forward in the future.

Halifax will be under no obligation to compensate those borrowers who do not take their complaint to the ombudsman, but industry sources said there would clearly be pressure on the bank to do so.

The bank would not say how many of its 2.5m borrowers are in a similar position to Mr Wright, with either a capped or discounted rate, but it is likely to be 500,000 to 1m, or more. A possible worst case could see the bank facing a bill of perhaps £250m.

Halifax grabbed the headlines in February when it launched a lower main standard variable mortgage rate, called "HVR2", set 0.75% below its old rate, now called "HVR1". However it said several hundred thousand existing borrowers with discounted and capped rate loans would have to stay locked into the old rate.

Mr Wright, of Henley-on-Thames, had a capped rate deal for which he pays a maximum of 7.25%. When Halifax launched its new lower standard rate, he assumed his mortgage would fall, thereby saving him an estimated £500 a year. But when he contacted the bank it said he was tied in to the old rate until 2004.

In his ruling, adjudicator Michael Ingram said Mr Wright's original mortgage documentation from 1998 said the interest rate charged would be "our base rate".

Mr Ingram said this phrase is not defined in the mortgage terms and conditions. "At the very least, the introduction of HVR2 rendered the phrase 'our base rate' ambiguous - because it might refer to either HVR1 or HVR2.

"It is a general principle of English law that an ambiguous term in a contract must be given the interpretation that is less favourable to whoever supplied the wording...My finding is that 'our base rate' now means HVR2."

HSBC is in the same position as Halifax, and is appealing its ruling. Meanwhile a ruling is awaited in a case involving Nationwide, and it is understood that complaints have been lodged in respect of several other lenders.

Mr Wright said: "Whatever the final legal outcome, Halifax has lost the moral ground here. The adjudicator has backed what we said entirely."

A Halifax spokesman said it was seeking a review because "there are quite a number of points we think it is appropriate to come back on". It is hopeful of a final decision in the next few weeks. The ombudsman said a review was "unlikely to result in a change".

What the ruling means

The ombudsman's ruling affects Halifax borrowers who hold a discounted or capped rate mortgage, which is linked to the old standard variable mortgage rate.

However it also affects sizeable numbers of discounted rate and capped rate borrowers with several other lenders, including Nationwide, Abbey National, HSBC and Cheltenham & Gloucester, all of which also brought out new variable rates while insisting some borrowers carry on paying the old rates.

In the case of the Halifax there are an estimated 40 complaints lodged with the financial ombudsman service awaiting the result of an appeal by the bank against the ruling.

The ombudsman service has already made a similar ruling, upholding a complaint from an HSBC borrower. HSBC is also appealing. If the Halifax appeal, which could take several weeks, goes against the lender, it is very likely that the original decision will become the ombudsman's policy and apply to any similar complaints.

This would suggest these people can also expect a refund of overpayments - which could run into several hundred pounds - and an inconvenience payment of £150. But the ombudsman will not consider an individual's case until he or she has gone through the company's internal complaints procedure first and reached deadlock.

The financial ombudsman service can be contacted on 0207-964-1000, its website is www.financial-ombudsman.org.uk. or people can write to it at South Quay Plaza, 183 Marsh Wall, London E14 9SR.

They may also want to contact the consumers' association, which has been deciding whether to mount a legal challenge of its own.