Nationwide 125% Mortgage

The Nationwide Building Society has introduced a mortgage allowing borrowers to take loans worth 125% of the value of the home they are buying.

It will only be available to existing customers in negative equity who want to move house.

Negative equity means that the value of someone's home is less than the amount they owe on their mortgage.

Nationwide said the deal was a very "niche offer" and that not everyone in negative equity would qualify.

The Financial Services Authority is considering limiting mortgage loans to 100% of a property's value.

The media have made a big deal of this over the last few days but it really is not an offer anything like those of a few years ago, neither is it increasing the lenders exposure.  For a start it is only available to existing customers who are already in negative equity and Nationwide will not consider increasing its net exposure e.g. if a borrower has a £125,000 mortgage secured against a £100,000 property, Nationwide’s exposure is not increased by allowing that customer to transfer that mortgage to another £100,000 property.

Furthermore, a few years ago, the rates for a 100% mortgage were only slightly higher than those offered to a customer with a decent size deposit.  On this occasion Nationwide are offering a rate of 6.73% on 95% of the value of the property.  The other 30% (taking the total up to 125%) will be offered at a rate of 7.23%.  This makes the overall rate equivalent to 6.85%, this is much higher than a Nationwide lender in negative equity would pay by staying in their current property and paying Nationwide’s variable rate.

In addition, lenders were previously offering clients up to 5 times their income, Nationwide’s lending criteria is much stricter for this product.  Borrowers have to pass a stress test to ensure they can still afford the mortgage repayments if interest rates have risen to 9% or 10% once the fixed-rate element of the loan has expired.

The media hysteria being created by certain individuals within the finance industry is therefore ill founded in my opinion.  Nationwide have simply taken a pragmatic approach that should not worsen their own position and will be helpful to certain customers.  This should promote the movement of money and assist in getting the housing market moving again.  Hopefully other lenders will follow suit.

Posted at 10:37AM Jul 09, 2009 by Kris Wigfield in Mortgages & Housing Market  |  Comments[0]