By Clare Francis, editor of Moneysupermarket.com
Nationwide Building Society's decision to offer a 125% mortgage had been met on some fronts by derision and condemnation – accusations of the return of irresponsible lending have been bandied around. However, such reactions risk misrepresenting Nationwide's move
Why is Nationwide's mortgage different from other 125% loans?
The building society's 125% mortgage is designed to help those who can't move house because they are in negative equity and wouldn't otherwise be able to get a mortgage. It is only available to customers it already has a relationship with and even then not all borrowers will qualify – only those with excellent credit ratings who Nationwide is confident will not default on their repayments will be eligible. This is very different from the 100%-plus mortgages that were available a few years ago.
Before the onset of the credit crunch, a number of lenders including Northern Rock, Abbey, Bradford & Bingley and Scottish Widows bank offered mortgages in excess of the property's value – these were designed to help people onto the property ladder. Northern Rock's Together mortgage was probably the most well-known: first-time buyers were able to borrow up to 125% of the property's value (although not all was secured against the borrower's home, part of it was advanced as an unsecured loan).
When house prices were rising, borrowing more than the value of your home wasn't necessarily a huge problem because you would quickly build up an equity stake through property price inflation alone. However, many of those who took out such loans didn't appreciate the risk they were taking on – what if house prices were to fall?
Obviously this is what has happened and many people now have homes that are worth less than the amount they paid for them – negative equity. Those who took out 100%-plus mortgages are potentially in the worst situation because they had no capital of their own in their property to cushion them from price falls.
This is partly the reason why mortgage lenders have become more cautious and now require new borrowers to put down a larger deposit. The problem is, many of those who bought in recent years with little or no deposit are now stuck – they have no equity in their home and they can't remortgage because banks and building societies aren't lending the high loan-to-values they were a few years ago.
It is possible to borrow up to 95% from some lenders, but in many cases you'll need a deposit of at least 10% and the leading rates are only available to those with even larger deposits – often 25% and in some instances 40%.
We now need other lenders to follow suit
This clampdown by banks and building societies on the amount they'll lend is one of the factors exacerbating the housing market downturn – many of those who need to move aren't able to because they are caught in negative equity and unable to get a mortgage. This is why Nationwide's decision to offer a solution for some of its customers caught in this position is welcome news and not irresponsible lending.
Nationwide is the first lender to formerly announce a product designed for its customers in negative equity, although others are adopting a similar strategy ‘under the counter'. We need more lenders to help people in this way in order to get the housing market moving again.
What's the deal?
The loans Nationwide is offering to those who need to borrow up to 125% are not cheap – this concept has been designed to help those who need to move, perhaps because they've got a new job in a different part of the country, but who would otherwise not be able to because their current home has fallen in value.
Customers will have the choice of a three or five-year fixed-rate deal – 95% of the loan will be secured against the property and the rates available are 6.73% on the three-year deal or 7.48% on the five-year fix. The ‘top-up' loan that enables you to borrow the remainder, up to 125% of the property's value, is fixed at 7.23% on the three-year option or 7.98% on the five-year product.
If you are in negative equity but don't need to move house, then the best option is to stay where you are and wait until house prices recover. Even if you can't remortgage, it's not the end of the world. Once the fixed or discounted period ends on your current mortgage deal, you won't suddenly find yourself having to repay the mortgage. You'll be moved onto your lender's long-term variable rate, so as long as you can afford the monthly repayments you can just sit tight and ride out the storm.
Disclaimer:Please note that any rates or deals mentioned in this article were available at the time of writing.
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