Memorandum and rules: Family Money obtained a copy of Irish Nationwide's Memorandum and Rules for clarification purposes. Section 17(2) says: "The board may at its absolute discretion vary the basis or method for charging interest on loans (including housing loans)" and 4(b) says the board may at its absolute discretion "From time to time increase or reduce the rate of interest payable under any mortgage loan or advance (if the terms of the Mortgage Deed or loan agreement so permits) and if such rate is increased, either require the periodical instalments payable to be increased or make other provisions for payment of the additional interest and, if such a rate is reduced, effect relief in whatever manner it may consider appropriate."

Irish Nationwide confirmed that "The Board under its powers is authorised to do all these things as stated as is every other mortgage lender subject to its obligations to manage the Society in a financially prudent manner by ensuring that the Society is financially strong to reassure Shareholders and Depositers (who supply the funds for mortgages) that their money is secure and that the Society is well managed and well run."

Penalties and arrears: Another customer has complained that she and her husband took out a variable rate interest mortgage of £40,000 with Irish Nationwide Building Society when the interest rate was more than 14 per cent. They had repayments of more than £500 per month.

Over the next seven years, they ran into financial difficulty and after several years, had accumulated arrears in excess of £8,000. The building society agreed to capitalise the arrears after the couple agreed to a one-off payment and a revised monthly payments regime.

After several months paying the new amount, the society wrote to say new monthly repayments would be reduced and on at least two separate occasions they were further reduced.

After a phone call to Irish Nationwide, the customers says she was told the interest rate was being reduced by two per cent but that the interest charged was at the society's discretion. The customer asked if they were being penalised because of their bad management of the mortgage but the society said this was not the case.

A few months later, she wrote to Irish Nationwide again seeking a reduction of her interest rate. She asks: Is there any way I can insist on them reducing the rate to the new rate being offered to first-time borrowers?

However, although some lenders are already offering the same rates for new and existing borrowers for marketing reasons, there is no way to force a lender to do so.

The customers' initial difficulty may have been compounded by Irish Nationwide's application of arrears penalties. Section 18 of the society's rules says that every borrower in arrears is fined at the end of each calendar quarter at the rate of "5p for each pound or part thereof on the total arrears in respect of all payments outstanding and not paid at the end of each quarter".

This rate is more expensive than some APRs for credit cards, which are normally regarded as the most expensive form of borrowing. Irish Nationwide's arrears penalty rate will soon be reduced. Irish Permanent and EBS do not charge penal interest on arrears.

In regards to penalties and arrears charges Irish Nationwide says "As interest rates have fallen, the Society has continued to adjust the interest charged on arrears. The charge is now 2 per cent per quarter. This in effect means that borrowers can be up to 3 months in arrears before any charge applies. It is our experience that the vast majority of borrowers would regularise their accounts within this period or reach some arrangement with the Society. At least five other institutions including one building society charge such interest on a monthly basis, which we believe, is unfair to the borrower who has a short-term difficulty."

Irish Nationwide believes other lenders have similar practices for additional unauthorised credit by borrowers which "equates to a bank overdraft or a personal loan. We note that bank overdraft rates are currently 10-11 per cent per annum, personal loans with competing lending institutions can be in the region of 12-15 per cent per annum. Also, credit card rates range from 18-23 per cent".

Irish Nationwide insists that it has a benign and accommodating policy towards customers in arrears in that depending on the circumstances, such charges can be waived in part or in full or suspended pending an arrangement to discharge the arrears. "The Society's objective is to have all borrowers comply with with the terms and conditions of their mortgage contracts and as we pointed out we give every assistance and encouragement to defaulting borrowers to regularise their position by arrangements such as interest only payments, capitalising of arrears or a moratorium on repayments for a fixed period etc." Capitalising a mortgage means that the arrears is added to the principal and interest and then the appropriate variable rate is applied. Depending on the circumstances, this may put borrowers in a worse position financially as they are now being charged variable interest on the outstanding arrears amount.

Section 17(3) of Irish Nationwide's Rules and Memorandum says "subject to any contrary term in the Mortgage, Loan or Advance Payment, the Board may capitalise any interest in arrears or fines outstanding so that interest may be charged thereon".

Penalty charges are counterproductive when a customer is already in difficulty, says a spokesman for the Office of the Director of Consumer Affairs.

The customers in this case may be stuck in their current position as their track record makes them unattractive to other lending institutions.