What Nationwide's 125% home loan means for the property market

This Nationwide 125% home loan has been attracting a lot of attention.

In case you hadn't heard, Britain's biggest building society frequently seen as the 'nice' face of high street banking is offering homeowners in negative equity the chance to borrow up to 125% of the value of a new property.

At first sight it sounds like a return to the crazy days of 2006 and early 2007. Hasn't Nationwide learned from what happened to Northern Rock, the most prominent bank to write these sorts of home loans?

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But in fact, when you look at the detail, you rapidly realise that the Nationwide deal is very different to the 'Together' loans that helped to sink Northern Rock. And this apparent return to the days of 100%-plus home loans certainly doesn't mark a turn in the property market

Why negative equity is only a problem if you want to move

Estimates of the number of people who'll end up in negative equity by the time this housing crash is out range from one in 10 to one in six, depending on who you listen to.

Negative equity is a pretty scary-sounding phrase. But in fact, it's not a huge problem in itself. All it means is that the loan secured against your home is bigger than the property's value.

Now clearly, if you don't have to move, this doesn't matter. Assuming you're still in work; you can afford your mortgage payments; and you have no desire for a change of location, negative equity isn't a problem. It's not particularly nice to know that your house is worth a lot less than you paid for it, but it's not a disaster.

The trouble arises when you have to move home for some reason. If your property is in negative equity, then if you sell it, the sale alone won't give you enough money to repay your lender in full. So you'll have to make up the difference somehow.

It also means you'll be hard-pushed to raise a deposit for your next property. That's not necessarily a problem if you're going into rented accommodation, but if you want to buy a more expensive house, there's no way you'll be able to do that without a nice big deposit.

Where the Nationwide deal comes in

So how are you going to move? Here's where the Nationwide deal comes in. And here's where you rapidly find that the '125%' headlines, screaming about a return to the days of careless lending, are a bit misleading. This loan really won't be an option that's open to many people.

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For one thing, you have to be an existing Nationwide borrower. So this is only open to people who are already in the housing market. Then there's the fact that it's very, very expensive indeed. For a start, you still have to cough up a deposit of 5% on the new home from your own funds. The charge on the loan for the other 95% is a painful 6.73% if you want to fix for three years, or 7.48% for five.

You then are allowed to roll over the negative equity from your old house, up to a further 30% of the new property's value. But that's charged at the even more eye-watering rate of 7.23% (for three years) or 7.98% (for five). According to the BBC, borrowers will also have to "pass a stress test" to ensure they could afford payments if interest rates were at 9% or 10% once the fixed rates have expired.

So it's expensive; and it's not open to first-time buyers, which means that it won't help seduce any more fresh blood into the property market. That's not a return to the days of easy credit. In fact, it looks much more like a very canny lender spotting a highly profitable if risky niche and pricing the product accordingly. As Kathryn Cooper points out in The Sunday Times, at a time when the base rate is 0.5% (and more importantly, swap rates are less than 3%), "the society is taking more than enough margin to cover its risk".

Why rising lending rates is good news

And as Allister Heath notes in this morning's City AM, lending rates are going up across the board. The average two-year fixed-rate home loan (assuming 25% equity) has risen from 3.98% in May to 4.47% in June, the biggest monthly jump since records began in 1995. Rates on a £10,000 personal loan are at their highest since 2002, and bank overdraft charges are rising too.

This is good news, in that it will encourage consumers to save more and pay off their debts. But it does mean that companies which rely on consumer spending, and property prices, which rely on cheap credit, remain very vulnerable.

MoneyWeek regular James Ferguson wrote recently on how house prices could have a lot further to fall. James will be arguing his point with other luminaries of the property market, including Stuart Law of Assetz, in our property roundtable later this month. If you're not already a subscriber to MoneyWeek, subscribe to MoneyWeek magazine.

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