Can banking institutions unilaterally impose new policies on customers with mortgage contracts? – Finance and banking

I recently dealt with a case where a banking institution in Cyprus asked the client to either repay his home loan early or transfer his loan to another bank. The reason given by the bank for this drastic demand was that the bank had decided on a new policy whereby all UK citizens’ home loans would be closed by the end of December 2022. It should be noted that although it this being a performing loan where a fixed repayment period had been agreed as well as a fixed monthly payment, the bank took the unilateral decision to modify its policy, thus affecting the terms of the agreement signed between the bank and the customer. The client therefore had to deal with this problematic situation through no fault of his own.

Strictly speaking, legally speaking, we are talking here about a clear case of breach of contract. Once a written agreement is entered into with the bank for a fixed term of repayment of the loan, any modification of the terms of this agreement immediately brings the other party into breach of the terms, which in this case was the bank requesting customer to repay their loan earlier than expected, putting the lender in a very difficult position and out of their scheduled repayment schedule.

Unfortunately, however, many times it happens that the terms of a loan agreement are one-sided in favor of the bank and that is where the unfair terms of the agreement slip in. At the time the client signed the agreement, he did not want to have realized the serious implications of these unfair terms. As a result, the bank takes full advantage of the situation where the lender is completely at the mercy of the bank and its policies.

Obviously, this is a legal question that can be challenged in court as to whether the bank has the right to make such a unilateral decision, taking into account the principles of unfair terms law in an agreement . In fact, the European Court of Justice has ruled in several of these cases of unfair terms and I confidently say that the European Court has most often ruled in favor of the lender rather than the banking institution.

The question that always arises, as in this case, is whether the lender is ready to engage in lengthy litigation in order to secure his rights or whether he will choose to transfer his loan to another banking establishment. Clearly, the lender must realize that he has rights and not only obligations towards the bank. From the moment when one of its rights is violated, as in this case, when the bank “forces” the lender to transfer the loan to another bank or to repay the loan to the bank earlier than the due date agreed and in a lump sum, the customer has the right to defend his case and seek advice from a lawyer to reach an amicable solution. The lender has every right to negotiate a discount on the loan balance, if he decides to repay it in a lump sum, whether or not he transfers the loan to another bank. The client was placed in the difficult situation of having to start the whole process of transferring his loan from one banking institution to another. Therefore, the motive of the lender in this case is mainly to reduce the loan repayment burden, before transferring the loan to another bank.

Another advantage that the lender should consider, if he finds himself in this problematic situation, is to negotiate a lower interest rate with the new banking institution. On the other hand, however, the new bank will carry out a credit check on the lender and it is possible that credit ratings at this very moment, when the pandemic has significantly affected the economy, could lead to a situation where the credit rating fell. As a result, the new bank may not grant the loan.

Another fact to consider is the need to negotiate with the existing bank the bank charges and other fees that will be charged to it not only by the existing bank but also by the new bank. Thus, the lender must be careful not to be billed these costs unnecessarily by the two banks.

In Cyprus, in recent years, what used to be considered a simple process of opening a bank account and obtaining a housing loan has become a rather complicated matter which, unfortunately, in many cases, if a client did not take the right legal advice from the start and before entering into an agreement with the bank, in the end, he could face the situation where the bank has the full advantage over the client, thus causing the customer many problems and costs in order to defend his rights.

The customer is usually too eager to get the loan and tends to sign the documents given to them by the bank without taking the time and effort to read the fine print, and as a result, the bank often includes unfair acts or irregular clauses in the agreement, for example, stating that the client took legal advice before signing the agreement, when in fact the lawyer providing this legal advice is not independent and does not did not clearly explain the terms of the loan to the lender. Thus, the bank covers itself in the event of a dispute that may arise during the term of the loan contract.

So, at the end of the day, when it comes to making such serious decisions as applying for a home loan, it is always advisable to seek independent legal advice and ensure that whatever documents you you sign with the bank, there is a balance of rights and duties between the bank and the lender.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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