Landmark ruling on rates

A landmark ombudsman ruling this week could pave the way for compensation payouts to as many as one million mortgage-holders. The ruling over so-called two-tier mortgage rates is a stunning example of a humble borrower taking on one of the world's biggest banks and winning.

At issue is the decision by several major lenders to bring in headline-grabbing new, lower standard variable mortgage rates but to forbid some of their existing customers from taking advan tage of these, insisting they stay tied to the "old" standard rate.

The Financial Ombudsman Service this week threw out an appeal by HSBC against an earlier decision that it had acted unfairly in not allowing a borrower to benefit from the lower rate.

However, while it's bad news for HSBC, the biggest losers look set to be Halifax and Nationwide, which both have similar test cases awaiting a final decision. Experts reckon this week's ruling - which was welcomed by the Consumers' Association - means they are almost cer tain to lose, too. Between them, Halifax and Nationwide have several hundred thousand borrowers who stand to benefit if the ombudsman finds against the lenders. Abbey National also has a case going through the ombudsman system.

Defeat for the high street giants would land them with a compensation bill potentially totalling several hundred million pounds.

Among those who have been watching with close interest is Chris Wright, who is the Halifax's test case borrower, and whose complaint has been highlighted by Jobs & Money.

The origins of the dispute date back to July 2000 when HSBC slashed its standard variable mortgage rate by almost one percentage point - but said that for discounted rate borrowers, their discount would continue to come off the old variable rate.

Then last February, Halifax and Nationwide both unveiled new lower mortgage rates. It looked as though all borrowers would enjoy a substantial cut in their monthly mortgage payments. But it emerged that many existing customers holding discounted rate and capped rate mortgages, or who were on the standard rate after enjoying a special deal, would continue to be tied in to the higher standard rate.

Angry borrowers deluged Jobs & Money with letters claiming the lenders had effectively created two standard variable rates and left them marooned on the higher one.

During the past few months the ombudsman service has ruled against Halifax, Nationwide and HSBC, though all three decided to appeal, which meant the cases went before chief ombudsman, Walter Merricks.

HSBC is the first of the three to get this final decision, with the others possibly learning their fate before Christmas.

Although HSBC hasn't disclosed details of the borrower, it is understood he is a discounted rate mortgage-holder who felt that what he pays should be linked to the new lower rate (currently 4.75%) rather than the old higher one (5.74%).

Mr Merricks ruled in his favour, and it is thought he has ordered HSBC to refund the money the borrower has been overcharged (probably a few hundred pounds), pay him a small sum for the inconvenience suffered, and link him to the lower rate, which means he will now be paying a rate of just 3.5%. HSBC says the decision is "unfair" but will abide by it. It is highly likely the ruling will also apply to other complaints concerning the bank that come forward. However, an HSBC spokesman says: "It does not set a precedent."

The bank has about 25,000 other customers on discounted rate deals but will not be automatically compensating them or putting them on to the lower rate. To be in with a chance of getting a similar payout, they will have to complain to the bank.

Meanwhile, scores of Halifax borrowers will be waiting with bated breath for the final decision on the Wright test case. It is hard to see the chief ombudsman coming to a different conclusion than that reached on HSBC. "The ruling would imply that they [Halifax and Nationwide] too will fail on appeal," says David Hollingworth at mortgage broker London & Country.

In its preliminary judgement issued in September the ombudsman service said the Halifax was wrong to leave Mr Wright, of Henley-on-Thames, Oxfordshire, stranded on its "old" standard rate. He had a mortgage with a rate capped at 7.25%, and was told that customers with capped and discounted rate loans taken out before March 1 this year remain linked to the old, higher rate.

However, the ombudsman service decided Halifax should put Mr Wright on to the lower rate, refund the money he has been overcharged and pay him £150 for the inconvenience suffered. Crucially, the ombudsman service ruled that, as of March 1, Halifax's "base rate" is the lower, not the higher, rate.

The final ruling will be hugely significant because there are vast numbers of Halifax borrowers in a similar position to Mr Wright. The bank has around 2m borrowers on mortgage deals linked in some way to the old variable mortgage rate (currently 5.75%). Of that total, perhaps 500,000 to 1m are on discounted rates, capped rates or locked in to the old variable rate after enjoying a deal, and could potentially benefit from the ruling.

If Halifax loses, strictly speaking it would only be required to compensate those who go to the ombudsman and win their case. But it is quite likely the bank would come under intense pressure to restore everyone who is affected to the correct position.

The same applies to Nationwide, which has around 210,000 borrowers who may be affected.

Where to complain

What should you do if you think you're getting a raw deal because of two-tier mortgage rates?

If you're an HSBC customer, get your complaint in to the bank. It may roll over and offer you compensation, or it may insist you take the matter to the ombudsman. If you're a discounted rate borrower in particular, this week's ruling suggests you've got a very good chance of winning.

The result of the Halifax and Nationwide appeals could be known in the next few weeks. If they lose, your chances of being able to successfully claim compensation will increase dramatically. Again, get your complaint in as soon as possible.

They may decide to settle the matter. If they don't you'll need to go to the Financial Ombudsman Service: Tel 0207-964-1000, website: www.financial-ombudsman.org.uk