Overpayment of Variable Interest Rates

Since the global financial crisis in late 2007 and the subsequent crash, the European Central Bank (ECB) has cut interest rates steadily to the current all time low of 0.05%. For holders of ‘tracker mortgages’ this has been good news, as the interest rate payable on these mortgages was contractually fixed to the ECB base rate, so when the ECB rate went down, the interest payable by the customer went down. These contracts were well drafted and so the banks have no say in the rate of interest; they must set the rate in accordance with the mortgage documents. Variable rates, however, are different.

The Variable Rate, or what the banks refer to as their ‘standard variable rate’ is an interest rate that is variable at the banks’ instance, either up or down, but it was usually stated that the rate would be varied in accordance with the ‘general interest rate’, or words to that effect, ie. If interest rates went up, the bank would raise the variable rate, while if they went down, the bank would lower the rate.

In 2005, Ken and Donna Millar entered into a number of mortgage agreements with National Irish Bank (latterly Danske Bank). These mortgages were taken out at the bank’s standard variable rate. The terms and conditions stated that:

‘Rates of interest are altered in response to market conditions and may change at any time without prior notice and with immediate effect.’

During the period from 2008 to 2013, the Millars found that, despite the historically low interest rates being set by the ECB, Danske Bank were consistently raising the interest rate on their loans. The Millars pointed out to the bank that the agreement only allowed them to change the rate in response to market conditions and, since the general interest rate had gone down, the bank should have lowered the rates on their loans. Danske bank refused to do so, arguing that ‘market conditions’ meant the market conditions in which the bank found itself, not the general conditions in the interest rate market and so the Millars brought the case before the Financial Services Ombudsman (FSO) in 2013. They argued that in not lowering the interest rate the bank was in breach of the agreement and that the Millars were entitled to a refund of overpaid interest and to have the future interest rate set at a level commensurate with the general interest rate. In December 2013 the FSO held in favour of the bank and so the Millars appealed to the High Court.

In September 2014, Mr. Justice Hogan in the High Court gave his decision on the appeal. He found that the Ombudsman’s decision was based on ‘a serious and significant error, or series of errors’ and could not be allowed to stand. Consequently, he ordered that the Ombudsman re-determine the case in line with his decision. This, in effect, represented a significant victory for the Millars and would have resulted in potentially severe losses for any bank who had increased interest rates on the variable rate loans during that period. In point of fact, it was common for banks to do so as they were losing vast sums of money on tracker mortgages which they needed to recover elsewhere. They did so by raising their variable rates.

Following the decision, both the bank and the Ombudsman appealed Mr. Justice Hogan’s decision to the Court of Appeal, which heard the appeal in February 2015. It is expected to give its decision shortly.

If the Court of Appeal were to uphold the High Court’s decision, it would be a huge blow to any bank that had raised their variable interest rates in the period from 2008 onward. It could open the door for the many hundreds of thousands of customers to reclaim overpaid interest and to require their banks to set future variable rates at a level in line with the general interest rate.

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