The Nationwide Announces 125% Mortgage Deals For Existing Customers
One of the UK’s biggest mortgage lenders, the Nationwide, is permitting its existing customers who have fallen into negative equity, but still want to move home, a mortgage deal that will lend them 125% of the value their new home.
Negative equity is where the value of someone’s home is less than the value of the mortgage outstanding on it. Therefore, if they sold there home at that lower value they would owe their mortgage lender money. Negative equity is not really a problem unless the homeowner is looking to sell or re-mortgage, or if they are in financial difficulties and are forced to sell.
Nationwide says that its existing customers who are in negative equity and want to move can obtain a 95% loan to value mortgage deal at a rate of 6.73% fixed for three years or 7.48% fixed for five years. They can then borrow up to an additional 30% with increased rates of 7.23% and 7.98%.
The idea behind Nationwide’s 125% mortgage deal is to enable its customers in negative equity who would not otherwise be able to move, the opportunity to do so and to carry the negative equity over to the new home. It maintains that the 125% mortgage deal is only suitable for a limited number of its existing customers and that since its launch in June 2009 none of its customers have actually applied for the deal.
The industry’s reaction to Nationwide’s announcement has been mixed. There has been widespread criticism of mortgage loans previously available prior to the credit crunch that were more than 100% of the property value since it immediately placed the homeowner in negative equity. Northern Rock, the now nationalised bank, was notorious for lending 125% mortgage deals. When house prices were rising dramatically between 2005 and 2007 there was no concern about being in negative equity for long and many homeowners expected house prices to continue rising.
It is arguable that lending more money to a homeowner already in negative equity who owns an asset that could fall further in value is not particularly wise. It is not expected that Nationwide will give the deal to many of its existing customers, which will in turn limit any potential losses.
However, the head of mortgages at moneysupermarket.com, Louise Cuming, welcomed the deal. She noted that Nationwide’s flexible approach should be applauded at a time when many other mortgage lenders are still being overly restrictive with their lending practices which is stifling the housing market. She said the fact that Nationwide is only offering the deal to its existing customers is important too. Because of this, Nationwide already has a relationship with its customer and will be able to assess the suitability of lending to those customers more accurately.
