Personal Finance: Nationwide hedgs its bets with low-cost euro mortgage

Tying your mortgage to European interest rates sounds attractive, but there are still a few penalties to be paid.

MORTGAGE CUSTOMERS were this week offered their first opportunity to take up a mortgage linked to European interest rates without taking a bet on the value of sterling in the next 25 years.

Nationwide, the country's biggest building society, has announced the first mortgage to be offered in sterling that links itself to European rates. Customers are being offered a rate pegged at 1.75 per cent over the base rate set by the European Central Bank, currently 3 per cent.

The society is also offering a 1 per cent discount on the first year's payments, meaning customers will initially pay just 3.75 per cent.

Other lenders have already offered mortgages linked to euro rates. But until now there has been one big stumbling block: the risk of a change in the value of sterling relative to the euro.

Because these original Euro-mortgages will be available in sterling but pegged to euros, the repayments can rise if the pound falls in value against the euro. Until now that has put off all but the biggest risk-takers. John Charcol, the mortgage broking firm, points out that the difference between euro and sterling rates, while substantial, may not justify this risk.

Euro base rates are just 3 per cent, but the lender must take a cut. Most mortgages in Germany, for example, rarely stray below 5.5 per cent. The different between a Euro mortgage and a sterling mortgage, on variable rates, may therefore come to as little as 1 per cent.

On the plus side, British lenders add a smaller amount to base rates to cover their costs than their German counterparts. So it would seem possible for them to offer mortgages at lower rates than those offered in Germany.

What makes Nationwide's mortgage different is that the customer not only enjoys the low euro rate and a more cost-efficient lender - more importantly, Nationwide will strip out the currency risk: "We have effectively hedged the currency risk with a third-party. But we haven't said exactly what we have done because we want to hang on to that competitive advantage," said Steve Blore, a spokesman for Nationwide.

The cost of that hedging is reflected in hefty early redemption fees which lock in the borrower for no less than 10 years. If borrowers redeem within five years they will pay 9 months' interest as a penalty. To secure customers' commitment, Nationwide is also charging a pounds 295 application fee.

Borrowers may also find that by buying this mortgage this year, they could miss out on falls in sterling interest rates as the UK approaches monetary union. If, for example, British interest rates fell to the Euro rate of 3 per cent, this mortgage would charge 4.75 per cent.

Other mortgages, with no margin built in for hedging, might fall below this level. Whether the deal is worth it will depend, like much else, on how long it takes the UK to join the euro.

Ian Darby, at John Charcol, is cautious about the Nationwide's loan because of its punitive redemption penalties. He says: "If you believe our interest rates are going to converge with Europe, then why tie to redemption penalties. You can fix with the Woolwich for three years at 4.19 per cent, and repay without penalty whenever you like."

`The Independent' is offering a free 36-page Guide to Flexible Mortgages, with tips on all aspects of home loans, including how much you can borrow, how to repay the mortgage and a list of useful names and telephone numbers at the end. For your copy of the guide, sponsored by First Active, call 0800 550551

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
News
people
Arts and Entertainment
Victoria Wood, Kayvan Novak, Alexa Chung, Chris Moyles
tvReview: No soggy bottoms, but plenty of other baking disasters on The Great Comic Relief Bake Off
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all