Rate for top-up mortgage goes through the ceiling: Sue Fieldman on a borrower resisting a 'discretionary' interest rise

ANTHONY CHALLIS is paying 22.1 per cent interest on part of his mortgage, nearly three times the rate for a standard high-street loan.

In 1988 Mr Challis and his wife, Martina, bought a maisonette in south London. They got a 100 per cent mortgage - 90 per cent from Halifax Building Society and a 10 per cent top-up from Provincial Bank.

The mortgage offer from Provincial provided that the interest rate would be 'set quarterly at our discretion by reference to the rate published as the sterling '3-month London Inter Bank Offer Rate' plus 3 per cent'.

The Libor rate - that at which banks lend to each other in the money markets - is currently 5.8 per cent. Libor-linked loans were marketed heavily in the late Eighties. The aim was for home owners to see their mortgage costs react quickly to wholesale market rates.

Mr Challis was to receive at least seven days' notice of any change in the rate.

He completed his purchase on 9 May 1988. The Libor rate then was 8.3 per cent and his mortgage rate was 11.5 per cent. The monthly repayment on the top-up loan was pounds 87.14, and the Halifax mortgage rate at the time was 9.8 per cent.

In late 1990, Provincial sold its mortgage book to a company called Top-Up Mortgage Services (Tums) of south-east London.

By March 1991 Mr Challis was paying pounds 128.43 a month. On 20 March 1991, Tums wrote to him to say his monthly instalment was to increase to pounds 162.80. There was no mention in the letter of what the new interest rate was.

At this time, interest rates were dropping fast. The Libor rate on 20 March was 13.2 per cent. By 1 May it was 11.6 per cent. The Halifax mortgage rate was also in rapid decline.

Mr Challis said: 'I subsequently found out that the new rate Tums was going to charge was 22.1 per cent. It really annoyed me, as it was meant to be by reference to Libor.'

He decided enough was enough and refused to increase his monthly payments. He continued to pay pounds 128.43.

Mr Challis has opted to try to pay off the Tums mortgage. However, there is a dispute about how much he owes.

His solicitor, Nicholas Tanner, said: 'The terms of the mortgage do entitle Tums to vary the rate from time to time, but we allege that borrowers were led to believe it was linked to Libor.

'We have worked out that had that rate been applied, the balance due is in the region of pounds 8,500 to pounds 8,700. We have sent them a cheque for pounds 9,000 - which we consider to be more than is due - with a view

to bringing the matter to a

swift and definite conclusion.'

Tums reckons that Mr Challis owes pounds 10,920.72. The company will not accept pounds 9,000 and insists that a further pounds 1,920.72 is due. Interest is accruing on the outstanding amount at 22.1 per cent.

David Massie, a director of Tums, said: 'When we purchased the portfolio from Provincial, we inquired as to the terms and conditions and they said that all the mortgage rates are set by the lender from time to time.'

Mr Massie is adamant that the documentation gives Tums discretion over the rates and that the mortgage offer does not bind the company to Libor plus 3 per cent.

He said the rate reflected the high-risk element of the loans.

'At the current time, the rate is more reflective of the bad debts and negative equity in the portfolio rather than wholesale money rates.' There are no plans to reduce the rate.

Norwich Union is offering top-up loans up to 100 per cent of the property valuation for professionals. The interest rate is 10.5 per cent variable or 11.5 per cent fixed.

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