Court of Appeal provides clarity for lenders amid ‘mortgage prisoner’ concerns

Michael Reading of Pinsent Masons was commenting after the Court of Appeal dismissed a legal challenge brought by a group of borrowers arguing they were forced to pay “an unduly high variable rate” on their mortgages after the 2008 financial crisis, rendering them as a class of bank customers known as ‘mortgage prisoners’. 

A mortgage prisoner is a borrower who is unable to switch to a new mortgage deal, even when they are up to date with payments, because they cannot meet affordability tests or because no lender will take them on. Mortgage prisoners are often trapped paying higher variable interest rates than mainstream mortgage customers because they can’t shop around for a new rate.

This issue became widespread among borrowers who had taken out mortgages with Northern Rock before the financial crisis. After Northern Rock was nationalised in 2008, thousands of former Northern Rock mortgages were transferred to TSB in 2016 and brought under its Whistletree brand.

In Breeze & Others v TSB Bank PLC, the borrowers argued that TSB had kept them on an unfairly high standard variable rate (SVR) specific to Whistletree, rather than applying the lower SVR used for TSB’s mainstream customers. They also sought relief under the Consumer Credit Act 1974 (CCA), arguing that there was an unfair relationship.

The borrowers’ core argument was that the contractual terms inherited from Northern Rock required TSB to apply its own lower SVR, rather than maintain the separate Whistletree rate. TSB argued that, under the general conditions applicable to the borrowers, it simply stepped into the shoes of Northern Rock and could continue to vary the inherited SVR without adopting its own house SVR.

In July 2024, the High Court ruled that TSB had not breached the express terms of the General Conditions applicable to the borrowers' mortgage contracts. The borrowers appealed, but on 26 January the Court of Appeal upheld the High Court’s decision.

When setting out the Court of Appeal’s reasoning, the judge held that the relevant contractual term was permissive and that there was no contractual requirement for TSB to align Whistletree borrowers with other TSB customers, and requiring such a switch would have frozen the inherited SVR until that choice was exercised – an outcome the court considered commercially illogical.

The Court of Appeal was also asked to consider whether borrowers could obtain relief affecting their mortgage pursuant to section 140B CCA due to the alleged existence of an unfair relationship with TSB. The borrowers’ problem was that section 140A(5) CCA provides that section 140B relief is not permitted “in connection with” a credit agreement, such as a regulated mortgage, including the very instrument at the centre of the dispute with TSB.

The borrowers’ argument arose out of the particular features of the Northern Rock product which comprised of a mortgage loan and a linked separate unsecured loan. On that basis they argued that the court was able to provide section 140B CCA relief because the court could look beyond the regulated mortgage and make an order “in connection with” the unsecured loan. 

The Court of Appeal rejected this argument. It adopted TSB’s case which was that that section 140A(5) CCA imposes a clear statutory boundary whereby courts cannot make any section 140B remedy “in connection with” a regulated mortgage contract, including repayment orders, interest adjustments or variations, even where that mortgage is a related agreement linked to an unsecured loan. The judge stated that borrowers cannot “use the unsecured loan as a back door” to obtain relief on a regulated mortgage.

Reading, a civil litigation expert specialising in financial services litigation, recognised that the judgment may be regarded as a significant “setback” for mortgage prisoners. However, he said the ruling also provided helpful clarification, both for lenders on their obligations and for borrowers on their rights to seek contractual or CCA based relief in the courts. “For lenders, it provides clarity from the Court of Appeal: CCA remedies cannot be used to unwind or amend regulated mortgages even where there is a related unsecured loan. This was an important clarification in circumstances where the CCA point had yet to be subject to appeal court scrutiny.”