Further delays in bank charge court case

November 23rd, 2007

UK banks have been granted an extension to the time they can put off customer complaints about excessive overdraft charges prompting outrage from consumer groups. Both sides are waiting for the outcome of a test case in the high court that could see a flood of claims as people demand the banks return the money taken from their accounts as charges for unauthorised overdrafts or bounced cheques.

A spokesman for the Office of Fair Trading said “the test case between the OFT and the firms is a crucial step in establishing certainty about the legality and fairness of unauthorised overdraft charges, when this certainty has been established complaints about unauthorised overdraft charges can be dealt with consistently and fairly.”

Banks have been making billions of pounds from the charges and have consequently been reluctant to change the disputed policies, despite growing numbers of claims being successfully settled in the small claims courts before the moratorium caused by the test case.

The point about which the whole case revolves is whether or not the charges are a fair fee for a service provided, as the banks claim, or are an unfair and illegal penalty charge as claimed by the OFT. The cost to the bank of an unauthorised overdraft or bounced cheque is usually around two pounds yet the customer is charged up to thirty pounds. There are further issues regarding the terms and conditions and whether or not they are liable to mislead customers.

“At the moment consumers pay for banking through surprises and through stealth,” said the head of the OFT, John Fingleton. “They don’t see what they pay – very often they pay when an unexpected event happens like an unauthorised unexpected overdraft,” he added.

Despite the moratorium on complaints being settled while the high court case is settled the consumer group Which is urging customers to continue making complaints. “Even though the banks won’t process the complaint, they will still have to acknowledge it. And if the OFT wins, as we hope it will, that means your complaint is already in the system and so you should be paid out more quickly.”

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House Price Crash Looming

November 21st, 2007

It is beginning to look more and more likely that a house price crash is looming here in the UK and it would seem that the culprit, surprisingly, is not the US sub-prime market. Admittedly the US has played its part but the culprit here is the legion of people in the UK buying to let. Or more specifically the people who have been ramping up the property market but have now suddenly stopped buying-to-let.

Demand has been killed off by the interest rate rises of the Bank of England that since 2003 have gradually (and since 2006 rapidly) increased the cost of borrowing. Now ‘it simply is not worth subsidising your tenant in the vain hope of capital gains after thirteen years of incredible rises.’ Put another way, the overvaluation in the market has become so obvious that people are no longer willing to ignore it but are waiting for the market to correct itself.

It is a simple economic maxim that when demand falls so will prices, especially if those prices have been artificially inflated by rampant speculation. The higher they have been the further they have to fall and according to The Economist, ‘the global housing bubble has been the biggest asset bubble in history’.

Oh dear.

The effect of this house price crash will vary from region to region. In Northern Ireland house prices rose 400% in about twelve years which puts them in line for the largest fall, although London will also suffer. The City, usually London’s life raft in times of minor economic difficulty is having its own serious problems. Those same buy-to-letters who just a year ago were optimistically buying are now returning to the market hoping to offload what could soon turn into millstones around their necks. Increasing supply in the market forces prices even lower and so the cycle goes on.

In 1997 Gordon Brown, as Chancellor of the Exchequer, promised an end to the times of boom and bust. It seems he may have been promoted just in time to eat his words.

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Foreign Currency Mortgages

November 19th, 2007

The strength of the pound against the dollar recently has seen many Brits heading across the Atlantic to claim the many bargains available to high street shoppers. Less well known, but growing in popularity, is the possibility of taking out foreign currency loans, especially dollar mortgages, and using currency speculation to significantly reduce the amount of the loan over time.

‘Holding a loan in a falling currency can help to reduce the outstanding debt by thousands of pounds in just a few months.’ These loans are usually arranged so that only the interest is covered by the repayments while the total is gradually reduced by fluctuations in the currency markets.

The attraction of this kind of loan is, therefore, obvious. The major drawback should, however, also be obvious; the high risk inherent in betting on a fluctuating market. Currencies can move in either direction and rather than decreasing the size of your loan, it could increase substantially.

Mike Boles at Savills Private Finance, a broker, said: “We have had more interest in foreign-currency products in the last six months from people who think they can benefit from currency movements and lower interest rates abroad. However, when the risks are explained, most decide against it.”

Risk is an integral part of many speculations where it is managed and minimised as appropriate and this takes a certain amount of dispassionate calculation. When it comes to people’s homes, however, they are just not willing to do this. A home is not a speculation but an investment and decisions need to be taken accordingly. For many people risk should not just be minimised when it comes to their home but be absent altogether.

The risk involved in foreign currency loans does not mean that they should be avoided entirely, but they should certainly be approached with a great deal of caution. I would suggest that they are of more relevance with second houses, which can be treated as a speculation and will tolerate a greater degree of risk. For a primary dwelling, the family home, risk is just simply unacceptable and so foreign currency mortgages are to be avoided.

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