It emerged this morning that the Nationwide Building Society is offering 125 per cent mortgages to some of its customers.
The move is at odds with the preferences expressed by Gordon Brown who wants to see mortgages capped at less than 100 per cent of a property’s value.
No doubt there will be those who are left speechless by the Nationwide move. Just as the housing market tries to shake off the hangover from the last party, along comes one of the UK’s top lenders with a large helping of hair of the dog.
But actually, dig a little deeper and things are not as they seem.
The new Nationwide mortgages are not targeted at new customers desperate to jump onto the property ladder, or climb up it and in the process land themselves with a massive mortgage.
Rather, the Nationwide offer is targeted at its existing customers who find themselves in negative equity, but who want to move.
The loan, says the lender, will only be available to customers who can afford the payments. More to the point, it says it doesn’t expect to make many loans of this type at all.
Negative equity can be a terrible thing. If you suffer from negative equity and are offered a new job, but which entails relocation, you may find you have no choice but to turn the job down.
It is even possible to conceive of circumstances in which negative equity can make it impossible to downsize. Suppose you conclude that your mortgage is too high, and you need a cheaper house so that you can cut your mortgage by, say, 20 per cent. If you suffer from negative equity in excess of 125 per cent, you just can’t do that.
You may hold the view that house prices rose far too high earlier this decade and needed to come down, and then stay down, improving affordability. This view may make sense for would-be homeowners, but for those already with high mortgages such a development could be disastrous. And if the further consequence is a fall in labour mobility, dynamism will be sucked out of the economy.
By offering 125 per cent mortgages, is the Nationwide taking on too much risk? Well, actually, when you think about it, the new loans don’t represent more risk at all. All the lender is doing is formalizing a situation that already exists. Its target customer is already in negative equity. The building society is simply acknowledging this. So the customer swaps his or her negative mortgage from one property to another – that is all. Except, there’s a bit more to it than that. When moving, the negative equity customers take on two loans – one for around 95 per cent of the new property’s value, and another for the balance, but carrying a higher rate of interest. So actually, by adopting this process, the lender is actually enjoying a higher return on lending.
The big snag with the Nationwide move is that it probably doesn’t go far enough. You can’t blame the building society. It should be cautious with its lending.
But, if house prices are going to stay low for some time, and negative equity remains a harsh reality for hundreds of thousands of property owners for several years, then there will be an urgent need for many more deals like this.
© Investment & Business News 2013