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Negative reaction to a positive move

Maybe it is because I am a journalist myself but one of the vaguely intriguing sidebars to the current financial crisis has been the way my fellow scribes have responded to the topic of borrowing and debt.

Only a short while ago, any trawl of the weekend personal finance press would have found at least one feature on how it was possible to circumvent usual lending criteria to buy your “dream home”, where lenders willing to offer higher than usual mortgage multiples were virtually guaranteed a name check.

Suddenly, we appear to have discovered a new hairshirt morality when it comes to writing about the subject – as was apparent last week, when the media picked up on the fact that Nationwide Building Society is offering a highly limited number of its existing borrowers a 125 per cent mortgage.

I first saw the story on several news websites late last Wednesday night, where the juxtaposition was repeatedly made between Nationwide’s initiative and the collapse into public ownership last year of Northern Rock, a business failure which followed – we were told – that bank’s decision to offer its Together loans, a combination of a mort gage and unsecured personal loan, of up to 125 per cent.

The tone of that article, and others I read, was unquestionably negative and they were reinforced the following morning on the Radio 4 Today programme, when one of its reporters brought a tame IFA on air, not a mortgage expert, alas, in order to opine on how terrible this initiative by Nationwide was.

Now, you might not remember this but there used to be a time when Nationwide could do no wrong, at least as far as journalists were concerned. Some time in the last 12 months, that decade-long love affair with Nationwide began to go wrong. The first glimmer of it came when the society started to hike up the APR it charged on its credit cards, closely followed by the decision to abandon its no-charge stance on overseas purchases.

In April, Nationwide announced a two-tier mortgage system, placing some of its new customers on to a significantly higher interest rate when their homeloan deal ends. Only last month, the society also took the lead in pushing up the price of its fixed-rate mortgage deals, triggering a round of rises from other lenders.

Now, depending on how you look at things, these events appear to have led some journalists to conclude that Nationwide is no longer on the side of the angels, which in turn means it is less likely to be given any leeway when it comes to future stories written about it.

But by most standards, the reaction to its 125 per cent mortgages was harsh. Nationwide’s deal is not a return to the days of Northern Rock-style Together products.

The concept of a loan that covers a negative equity element of a borrower’s mortgage is not a bad one in and of itself. It first saw the light in the mid-1990s, when people were trapped in their existing homes for years, especially at a time when endowments were all the rage and people were only paying interest on their mortgages.

Here, Nationwide is offering its mortgage to existing customers who need to move home, can comfortably afford increased payments but find themselves stranded in negative equity due to the fall in property prices. Moreover, unlike in the 1990s, a few years’ energetic repayments today can significantly dent those negative equity figures, which makes Nationwide’s product potentially more viable, especially if all applicants are carefully vetted first.

What also eluded one or two of my colleagues was the fact that if you are in negative equity, you already have a mortgage where the LTV is greater than 100 per cent. In Nationwide’s case, what it is doing is allowing buyers of a new property who can afford to do so the option of carrying over that debt – while at the same time asking them for a further 5 per cent up-front deposit.

If there is one thing Nationwide definitely does need to be taken to task over, it is the incredibly high charges it levies on the rates that apply to this product – 6.73 per cent for the main part of its three-year fix and 7.48 per cent for the five-year deal.

The top-up element over the 100 per cent LTV is priced at 7.23 per cent over three years and 7.98 per cent over five years. That is pretty outrageous – yet very few of the reports I read bothered to comment on these extortionate rates.

One week later, what can we learn from this kerfuffle about Nationwide’s 125 per cent mortgages? The first, clearly, is that there’s nowt as frightening as a media pack indulging in a periodic fit of morality. The second is that had Nationwide not abandoned its whiter than white stance on other elements of its product range, it might have been given the benefit of the doubt in this case. A lesson to be learned there, perhaps.

The final lesson concerns the IFA brought in to confirm Radio 4’s prejudices. One wonders what advice he would give if one of his clients came to him and asked for his help in finding an appropriate mortgage because he was in negative equity, yet a change in jobs meant he needs to move home. Stay put?

Nic Cicutti can be contacted at
nic@inspiredmoney.co.uk

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