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
election 2015The 10 best quotes of the campaign
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

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

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'