Banks charging penalty interest on arrears when outside MARP

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44brendan

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Copied from another thread - Brendan


there is a further downside to being excluded from MARP. That is the re-imposition of penalty interest rate (surcharge) on the arrears element of the facility. In at least one lender, that penalty rate if .5% per month or 6% pa on top of the standard rate. If that were applied it would rapidly erode any equity in their property!! Surcharge rate is likely to be a standard for all banks!
 
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Hi brendan

While most contracts allow the lenders to impose penalty interest on arrears, I was not aware that any lender does it.

Do you know of any lender which actually imposes it?

Brendan
 
Do you mean a penalty on top of the normal interest charged on the mortgage (and arrears)?
 
Generally, the contracts allow them to charge additional interest on the arrears portion only.

So let's say you have a mortgage of €100,000 @4% which includes €10,000 arrears with additional interest of 6% per annum.

In a year, you would be charged €4,000 + €600.

Under the MARP, they are not allowed to charge such penalty interest. But even before the MARP, I don't think that any lender was still charging it. Irish Nationwide charged 5% per quarter at one stage. The sub-primes actually charged it as well.

It's commonplace on business loans and I have seen it on buy to lets as well.

By the way, I think it would be wholly justified on tracker mortgages.

Brendan
 
The penalty fee to be charged to consumers in arrears must be clearly stated within the Mortgage contract terms.The said clause should also clearly state how and when these penalties will be applied The penalty must not be excessive otherwise it will risk as being classed as an unfair term.
 
I see this wording from a Bank of Ireland offer of a split mortgage


Fees and charges relating to arrears
We may charge extra interest at the rate of 0.50% a month or part month (equal to 6% a year) on any amount you do not pay by its due date. This extra interest is to cover the increased administration and related charges we have as a result of the arrears and is added to the normal interest charged on your mortgage.

We do not charge this extra interest if you are in our home Mortgage Arrears Resolution Process, as long as you co-operate with us during the process.

You can avoid or reduce extra interest charges by making sure your mortgage account does not go into arrears or, if this is not possible, by paying off any existing arrears as soon as possible.
 
I believe with the details and wording you have supplied, that the bank has complied with its obligations under section 134 of the Consumer Credit Act 1995. However I do not have details of the split loan interest rates. For example, if the mortgage was 50% tracker at 1% above the ECB rate and the other half of the mortgage was a variable rate of 4.75%, then it could be argued that an annualized default penalty interest rate of 6% is excessive.

I cannot post a link on the matter as I do not have the required amount of posts on this site !
 
Generally the default interest rate is a standard across the board. I.e. Would be .5% pm in at least 3 banks that I am aware of. This penalty charge is included in "General terms and Conditions" and while it may be considered to be excessive it is perfectly legal. An exclusion from MARP in the case of a HL or an arrears situation for any other loan will generally lead to a surcharge rate being applied.
Banks are prohibited from charging surcharge where the borrower is covered by the MARP process. I am aware of a number of loan facilities where the standard rate is less than 1.5% and the surcharge rate is 6%pa.
 
All default penalty interest rates are perfectly legal until they are challenged as being excessive , either through the financial ombudsman's office or through the courts.

Again I cannot post a useful link on this matter.
 
Asphyxia said:
All default penalty interest rates are perfectly legal until they are challenged as being excessive , either through the financial ombudsman's office or through the courts.
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How are distressed borrowers expected to foot the costs involved in going to court over such a matter and taking the risk that they might lose (and maybe face additional costs)?!
 
I think it's a theoretical question. None of the lenders actively charge it at present. If they do, I doubt if the courts would find 6% p.a. excessive.

I certainly think that lenders should be allowed charge additional interest on arrears on trackers, even under MARP.

Brendan
 
Somebody with BoI with a relatively small amount of arrears.
c. €5K on a balance of €220K with a property worth maybe €250K-€300K.
Outside of MARP at the moment as far as I can tell (although it's never easy with BoI!).
According to a recent letter 0% is charged on the arrears - is this standard practice? For BoI? For most or all lenders?
 
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Asphyxia said:
All default penalty interest rates are perfectly legal until they are challenged as being excessive , either through the financial ombudsman's office or through the courts.

.
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And this? How can you take a case that the penalty interest rate is excessive? How much is excessive? Has there ever been a case?
 
There has never been such a case taken in an Irish court, as all lenders in Ireland do not charge excessive penalty interest rates, indeed the main providers do not charge any supplementary penalty interest rate at all. I think there have been a few cases successfully taken in the U.K.
 
Really? I am not aware of any such cases.

The UK ombudsman has certainly upheld a number of complaints relating to charges applied by lenders to mortgage accounts in arrears for a variety of reasons but I am unaware of any cases where the UK ombudsman or courts found an interest charge to be unfair on the basis that it was "excessive".
 
Sarenco said:
Really? I am not aware of any such cases.

The UK ombudsman has certainly upheld a number of complaints relating to charges applied by lenders to mortgage accounts in arrears for a variety of reasons but I am unaware of any cases where the UK ombudsman or courts found an interest charge to be unfair on the basis that it was "excessive".
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Sarenco said:
Really? I am not aware of any such cases.

The UK ombudsman has certainly upheld a number of complaints relating to charges applied by lenders to mortgage accounts in arrears for a variety of reasons but I am unaware of any cases where the UK ombudsman or courts found an interest charge to be unfair on the basis that it was "excessive".
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Sarenco,

you are probably aware to these types of cases in the good old U.S.A.
 
I'm not actually but in any event the Unfair Contract Terms Directive has no application in the US.
 
Sarenco said:
I'm not actually but in any event the Unfair Contract Terms Directive has no application in the US.
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Well you would want to look the cases up, they are there, but you are right, there is no unfair terms directive in the USA, they only judge items as being fair or unfair, excessive penalty interest rates on arrears is class as excessive, simple really, maybe the European Union could take a page out of the USA's legislation.
 
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