‘Nationwide launch mortgage with interest rates fixed for 25 years’
July 18, 2007 at 11:56 am
Nationwide has become the first UK lender to respond to the government’s desire to make long-term fixed rate mortgages more common. It has re-opened its 25-year fixed rate mortgage, which was originally launched on 26th March this year but only backed by £50 million worth of funds, which had run out by the 4th of May due to consumer demand.
The deal has its interest rate fixed at 6.39% for people buying, and 6.49% for those re-mortgaging. A minimum 10% deposit is required, and the building society charges a £599 reservation fee. Borrowers are tied into the product for the first 10 years, after which they are free to move to a different provider. However, if one was to re-mortgage somewhere else within the 10 year period, a 3% penalty fee would be levied.
This deal compares favourably with an existing 25-year fixed rate mortgage from Kent Reliance Building Society. Its borrowers are charged a penalty if they want to move their mortgage elsewhere at any point within the 25 year tenure. So, if in 15 years the Bank of England rates are significantly below Kent Reliance’s current 5.98% rate, you will be charged 3% of the amount you pay off if you want to renew your mortgage deal and take advantage of the lower rates on offer elsewhere.
Although Nationwide’s tie-in period only lasts 10 years, it has been criticised by some commentators who argue that most people do not want to commit to one property for so long. David Hollingworth, a mortgage broker at independent London & County, commented, “We sell very low volumes of these products. Most customers are not interested in locking themselves in for even 10 years, let alone 25.”
This contrasts to Europe, where mortgages of this length or longer are standard. Lenders there are more prepared to commit to long-term fixed rates because they fund the mortgages with bond issues, rather than borrowing from the money markets, as UK lenders do. This makes them less susceptible to shifts in central bank interest rates.
Gordon Brown has identified this uncertainty over exactly how much a mortgage will cost as a barrier for first time buyers, which he and his new government believes is an increasingly political issue, and one that could damage his party’s prospects of retaining power.
However, judging by the press reaction and comments from industry insiders, long-term fixed rate mortgages are not going to do a great deal to reduce these barriers. Particularly if they are being launched now, which many believe is the top of the current interest rate cycle. Borrowers may look back over the last 10 years and conclude that Nationwide’s 6.39% is expensive – rates were between 4 and 5% for much of the decade. However, on a 25-year basis, the deal looks very competitive, with rates around 11% at the beginning of the 90s.
