Nationwide offers 125% mortgage
Nationwide is offering its existing borrowers who want to move home but are in negative equity the opportunity to increase their mortgages up to 125% of the value of their new property.
The building society currently only offers new mortgages up to 85% of a property’s value, or 95% to existing borrowers moving home. However, in light of the increase in the number of people hit by falling house prices and now in negative equity, it says it will allow such borrowers to shift their deficit onto a new property and borrow additional cash against it.
Under the scheme, borrowers moving up the property ladder will be able to take out a mortgage up to 95% of their new home’s value – thus requiring them to put down a 5% deposit. They can then carry over any negative equity from their previous property up to an additional 30% of the new property’s value – bringing their total mortgage to 125%.
However, it comes at a cost. There are only two mortgage rates available under the scheme: the first is a three-year fixed rate priced at 6.73% for the first 95% mortgage, and 7.23% on any additional debt carried over. The second is fixed for five years, and is priced at 7.48% for the first 95% and 7.98% for the remaining 30% of the total mortgage.
In addition, Rosemary Callender, spokeswoman for Nationwide, says the deal is only available to customers who pass its strict lending criteria: “We are in no way relaxing our affordability and credit scoring checks.”
Customers who take advantage and are moving up the property ladder will also face paying an early repayment charge, which could be as much as 3% of their original mortgage amount. People ‘trading down’ – that is, buying a cheaper home – will not have to pay this charge.
People taking advantage also need to consider the cost of moving, which could total £5,000 or more.
Callender adds that it only expects a very small number of customers to qualify for the scheme, which is limited to existing Nationwide mortgage customers in negative equity who wish to move house.
Crucially, people moving up the property ladder under this scheme will actually see their loan-to-value (meaning the proportion of the property’s value that is covered by the mortgage) decrease.
Ray Boulger, senior technical manager at John Charcol, gives the example of a borrower who has a £200,000 mortgage on a property now only worth £180,000 – meaning they are £20,000 in negative equity. However, if this borrower wants to move to a new property costing £250,000, they can borrow 95% from Nationwide (£237,500) plus carry over their £20,000 of negative equity, giving them a total mortgage of £257,000, of which just £7,000 is negative equity.
Boulger says: “This scheme is good for existing Nationwide borrowers, and good for the housing market overall. I believe at least two other big lenders will offer similar deals before the end of the year.”
However, he points out that people taking advantage will probably get a big payment shock, especially those currently on Nationwide’s standard variable rate, which is currently just 2.5%.
The deal comes as new research shows that nearly 25% of people are unable to move house because they can’t find a mortgage. The poll, commissioned by the National Association of Estate Agents (NAEA), reveals that 58% of people believe banks must begin lending more if the UK is to pull out of the property slump.
Peter Bolton King, chief executive of the NAEA, says: "The government must do more to put pressure on those banks that are refusing to lend, while highlighting those banks that are easing restrictions to help get the economy moving again.”
However, new figures from the Council of Mortgage Lenders show an improvement in lending criteria. It says: “We might expect to see a modest easing in these measures over the summer, as some higher loan to value products came on to the market in recent months and lenders reported that they intend to increase lending at higher loan to value ratios in the Bank of England’s recent credit survey.”
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.