Negative equity mortgages hit the headlines again this week after it was revealed that the Nationwide building society is offering loans of up to 125 per cent to some of its borrowers. While many commentators' first reaction was to hold their hands up in horror at the fresh example of imprudent lending, the mutual's move is actually an example of a sensible approach to helping borrowers in these times.
Far from promoting the product to people, the building society quietly introduced it more than a month ago to help the few customers it has who are stuck in a negative equity situation but need to move home. The main reasons people may have to move home are because of their jobs, or their families. Either could mean having to travel across the country, leaving behind their property.
Anyone in that position would have few options. One could be to let out their existing home and rent in their new area – but that could lead to problems with tenants and financial difficulties if the place remained empty while mortgage demands continued to need to be met.
Or they could arrange a new loan to cover the negative equity portion of their mortgage at current commercial rates. That wouldn't be cheap and could mean stretching their finances to breaking point – which could in turn be a short step towards the misery of repossession.
At a stroke the Nationwide is offering its customers a viable alternative way out of what could otherwise be an impossible and upsetting situation. The building society assures me – and I believe the mutual – that it will only offer the deals to people who pass a strict set of criteria, including being able to prove that they need to move and that they can afford to repay their debts.
It does mean the mutual will be taking a risk, but that's why the cost of the deal – from 6.73 per cent for a three-year fixed rate for the mortgage and from 7.23 per cent for the top-up loan – is higher than standard deals. The extra cost should also discourage some wavering borrowers from rushing to apply for the deal, but is cheap enough to help people who may otherwise have been forced to find funding from one of the more unscrupulous lenders out there who would have been happy to charge 20 per cent or more for the top-up loan.
The Nationwide is also demanding a 5 per cent deposit from anyone wanting to take up the offer, which should rule out plenty of other people on a less sound financial footing. In summation, the building society is not encouraging people to take on excessive debt but offering them a helping and understanding hand. These are not normal times in the housing market and this is a positive move from the building society. Other lenders would do well to consider a similar prudent approach to help struggling borrowers.