Louise Cuming, head of mortgages at moneysupermarket.com, said: “The Nationwide offering is an interesting variation on the fixed rate mortgage, but can it conquer where others failed? It’s very risky for people to commit to a single product with one lender for such a long time when nothing in the future is guaranteed.
“Unless you have a crystal ball to foresee your own situation and future interest rates, it is ludicrous to allow yourself to be tied into a contract for this length of time – even though the product boasts no earlyredemption fees after 10 years. Not only this, but interest rates are expected to start reducing next year, so it makes no sense to commit now to what is potentially a high rate of interest.
“It strikes me as a clever marketing ploy to maximise customer retention by taking advantage of people’s desire for ‘security’. I would urge people to look elsewhere for peace of mind – there are plenty two- and three-year deals on good rates. But, if a longer term fix is required with a ‘get out’ clause after 10 years, better options are available through providers such as the Derbyshire, Yorkshire Building Society or Skipton Building Society.”
Ray Boulger, senior technical manager at John 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 per cent over the last four months and the cost of funds now fully reflects the expectation of one further increase of 0.25 per cent 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 per cent.
“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 per cent 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 per cent loan-to-value will find cheaper deals from Kent Reliance B S (5.15 per cent) and Manchester B S (5.39 per cent), 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 per cent to 30/4/22 (maximum LTV: 85 per cent), 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 per cent to 31/3/17. The rate on this deal, which has a maximum LTV of 80 per cent, is over 0.5 per cent 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 per cent 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 per cent and 90 per cent loan-to-value, where it offers a rate of 5.49 per cent and other lenders are less competitive. For remortgages and existing customers wanting a product switch the rate is 0.1 per cent higher at 4.59 per cent. This deal looks expensive for purchasers wanting between 90.01 per cent and 95 per cent as they will be charged 0.3 per cent more with a rate of 4.79 per cent. This means that anyone borrowing over 90% LTV and keeping this mortgage for the full 25 years will pay a whopping 7.5 per cent 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 per cent of the mortgage amount on a 95 per cent mortgage, just a fifth of the extra interest Nationwide would charge a 95 per cent borrower over the full term of this mortgage. If Nationwide feels that a 0.3 per cent premium is appropriate for a 95 per cent mortgage, and this is broadly in line with the market, it should limit the time this premium is charged to the first five years to avoid charging more than the cost of a typical HLC.”
