Kerr v Nationwide Building Society

A lender may stipulate that the agreed interest rate remains payable until the loan, including accumulated interest arrears, is repaid. A modest annual compounding provision for arrears is permissible. Where the rate is unchanged after default and is accepted as commercially reasonable, the continuing charge is not a penalty. The lender’s loss is not measured simply by its own wholesale borrowing costs, because the mortgage rate reflects the wider costs of providing retail lending services. Under the Consumer Credit Act 1974, acceptance that the underlying mortgage rate is not extortionate may, together with ordinary business knowledge, enable the lender to discharge its burden of proof.

Mr Kerr obtained a mortgage and top-up loan from Nationwide Building Society. The mortgage terms required repayment over 25 years, charged interest at a variable mortgage rate and permitted annual compounding of arrears.

He claimed repayment of approximately £10,000. He argued that interest should not be compounded, that arrears should bear interest only at Nationwide’s borrowing cost, and that the bargain was an extortionate credit bargain under sections 137 to 139 of the Consumer Credit Act 1974. The Reading County Court dismissed the claim. Mr Kerr sought permission to appeal.

The central issues were whether the continuing mortgage rate and annual compounding constituted a penalty, and whether Nationwide had proved that the credit bargain was not extortionate.

1. Permission refused. There was no realistic prospect of success on either ground.
2. A creditor is entitled to interest on money lent until repayment and may stipulate that the agreed rate continues until the debt is paid. That entitlement extends to accumulated arrears added to the loan.
3. A modest provision for annual compounding of arrears is an accepted incident of banking transactions. The court relied on The National Bank of Greece SA v Pinios Shipping Co No 1 & Anor [1990] 1 AC 637.
4. A continuing charge at the same rate is not a penalty merely because the borrower has defaulted. The agreed price of the borrowing does not become penal when the rate remains unchanged. The reasoning in Lordsvake Finance plc v Bank of Zambia [1996] QB 752, concerning a modest increase reflecting increased credit risk, supported that conclusion. Here there was no increase at all.
5. It was misconceived to measure Nationwide’s loss solely by its cost of borrowing. The mortgage rate reflected the costs of converting wholesale borrowing into a retail, personalised mortgage service, and the building society borrowed in a different market.
6. Although the burden under section 171(7) of the Consumer Credit Act 1974 rested on Nationwide, the accepted non-extortionate nature of the mortgage rate and the judge’s knowledge of ordinary business affairs entitled him to find that the burden had been discharged.
7. The first-instance judgment, although brief, adequately addressed the arguments. Permission to appeal was refused.

• Reading County Court: His Honour Judge Morton-Jack dismissed the claim, finding no penalty provision and concluding that the mortgage bargain was not extortionate.
• Court of Appeal (Civil Division): Permission to appeal was refused by Lord Justice Rix on 1 February 2002.