Launch of Nationwide's new 25 year fixed rate mortgage
Written on 24 April 2007
Commenting on the launch of Nationwide’s new 25 year fixed rate mortgage, Ray Boulger, Senior Technical Manager at Charcol, said:
"Nationwide’s decision to launch a 25 year fixed rate provides a welcome addition to the choices available for borrowers looking for long term security. However, 25 year swap rates have increased by around 0.4% over the last 4 months and the cost of funds now fully reflects the expectation of one further increase of 0.25% in Bank Rate to 5.5%. After the 8 – 1 vote for no change, with one vote for a cut, at the March meeting of the Monetary Policy Committee it looks increasingly likely that rates are close to their peak for this interest rate cycle. Therefore borrowers looking for long term security need to consider carefully whether now is the right time to lock into a long term fix. For example, as recently as January of this year Kent Reliance Building Society were offering a 25 year fixed rate at 4.98%.
"Long term fixed rates are ideally suited to borrowers who intend to live in their property for the long term, and prefer the security of a constant monthly mortgage payment to help with budgeting. This Nationwide mortgage addresses one of the main reasons why most people don’t buy long term deals, i.e. the early repayment charge (ERC). It does this by only imposing this charge for the first ten years. Thus another way to look at this mortgage is as a ten year fixed rate with an option to continue at the same rate with no ERC for up to another 15 years without incurring any further costs.
"The fact that this mortgage is flexible is also important as the longer the term of the deal the more important it is to have some flexibility. However, it is disappointing that Nationwide still limits ERC free overpayments to £500 per month during the ERC period, compared to the much more common 10% p.a. offered by many lenders. Whilst £500 per month will be adequate initially for most borrowers who want to make regular overpayments, in time as their income increases this may be too restrictive. It also means the mortgage is not suitable for those borrowers who want to make substantial annual overpayments from, for example, a bonus.
"Customers looking to borrow up to 75% loan to value will find cheaper deals from Kent Reliance B S (5.15%) and Manchester B S (5.39%), but although both of these deals allow the same ERC free overpayments as Nationwide neither of them are flexible. Borrowers wanting maximum flexibility should consider Northern Rock’s 15 year fixed rate at 5.39% to 30/4/22 (maximum LTV: 85%), which allows unlimited ERC free part repayments as well offering all the flexible features. Another option to consider is a 10 year fixed rate from Derbyshire B S, 4.95% to 31/3/17. The rate on this deal, which has a maximum LTV of 80%, is over 0.5% cheaper than Nationwide’s lowest rate but it doesn’t offer the option to continue on the same rate for up to another 15 years. Thus the trade off is to either save about 10% in interest payments over the 10 years and then choose the best deal available at that end of that period or to pay a higher rate to Nationwide with the guarantee of the option to continue at the same rate for up to another 15 years. It is anyone’s guess as to where interest rates will be in 10 year’s time!
"Where the Nationwide offer looks most attractive is for purchasers wanting between 75% and 90% loan to value, where it offers a rate of 5.49% and other lenders are less competitive. For remortgages and existing customers wanting a product switch the rate is 0.1% higher at 4.59%. This deal looks expensive for purchasers wanting between 90.01% and 95% as they will be charged 0.3% more with a rate of 4.79%. This means that anyone borrowing over 90% LTV and keeping this mortgage for the full 25 years will pay a whopping 7.5% extra over the term.
"Nationwide is quite rightly critical of lenders who still impose a Higher Lending Charge (HLC) but a typical HLC equates to about 1.5% of the mortgage amount on a 95% mortgage, just a fifth of the extra interest Nationwide would charge a 95% borrower over the full term of this mortgage! If Nationwide feels that a 0.3% premium is appropriate for a 95% mortgage, and this is broadly in line with the market, it should limit the time this premium is charged to the first 5 years to avoid charging more than the cost of a typical HLC."
Pros and Cons of long term fixed rate deals:
- If the interest rates increase over the fixed rate period, you are protected from the rise and your payments will stay the same.
- Suitable for borrowers who prefer the security of guaranteed mortgage payments to help budgeting.
- The longer the term the better value you get for the various costs such as the arrangement fee, valuation fee and exit fees, as these costs can be amortised over a longer period.
- Mortgages with ERCs are normally portable, subject to meeting the lender’s criteria at the time of moving, and so may be suitable for people not intending to stay in their property for the period of the ERC (but see Cons).
- If the interest rates fall during the fixed rate period you will not benefit from that fall.
- You are normally tied-in to a fixed rate for the duration of the special deal, so if you pay off the mortgage in full you would have to pay an Early Repayment Charge.
- If you move and port the mortgage to a new property, and need to borrow an extra amount, you need to avoid choosing a top-up product that has ERCs for longer than the remainder of the existing one, which may mean that the extra borrowing is not on a competitive rate.
- If you can not meet the lender’s criteria at the time you want to move, perhaps because you have recently gone self employed and can’t prove income, you temporarily have a lower income as a result of maternity leave or your credit status has deteriorated, or the property you want to buy is not acceptable security to your particular lender, you may not be allowed to port the mortgage, meaning you either can’t move or you have to pay the ERC.
For further information, please contact:
Senior Technical Manager
020 7611 7072 / 07977 277431
BORROWERS SHOULD CONTACT 0800 358 5560
Sign up to our Newsletter
Receive our monthly email newsletter and keep up to date on the current condition of the mortgage market alongside product news that may be of interest to you.