Nationwide launches 'honeytrap' mortgage as house prices fall

Published 04th May 2011

Nationwide is launching 95pc loan to value (LTV) mortgages to make it easier for first time buyers to get on the housing ladder at the same time as it reports house prices are still falling.

Observers who believe house prices remain over-priced may suspect the return of 95pc LTV mortgages could prove a honeytrap for first time buyers; tempting them to pay more today than these properties will fetch next year.

Against that, pessimists have been forecasting sharp falls in house prices since long before the credit crisis began but the property market has proved remarkably resilient, delivering substantial tax-free profits to most medium to long term investors.

The new mortgage offer – which requires regular savings before application for a mortgage – follows similar offers by Yorkshire & Clydesdale, Cumberland and Nottingham building societies. Also, Nationwide’s latest figures present a mixed picture with no evidence of prices passing a tipping point.

Robert Gardner, Nationwide’s chief economist, said: “The price of a typical house fell by 0.2pc in April, which left prices 1.3pc lower than the same period of 2010. The three month on three month measure of house prices, a better measure of the underlying trend, showed a modest rise of 0.6pc.

“Since November 2010 house prices have increased in three months and fallen in three months. However, it is not unusual to see a pattern of modest monthly increases and decreases when the market is fairly static, as has been the case since last summer.

“There is still little evidence to suggest that price declines will accelerate in the months ahead. While the UK economy only managed a modest bounce-back at the start of the year, after the weather-induced contraction in late 2010, the economic recovery is expected to gather momentum.”

From Friday, May 6, the building society will launch Save to Buy, an account for first-time buyers who save regularly towards their deposit that enables them to apply for a Nationwide mortgage with a deposit of just 5pc of property purchase price.

Save to Buy will pay 2.5pc gross on savings which must be at least £50 a month and can earn cash-back rewards of up to £1,000 on savings of £10,000. But rates charged on 95pc mortgages remain high. Nationwide currently charges 6.59pc fixed over three years with no fee or 6.29pc with a £900 fee for which Save to Buy borrowers may obtain a £500 discount. For five year fixes on 95pc loans, it currently charges 7.09pc with no fee and 6.89pc with fees.

Melanie Bien, director of independent mortgage broker Private Finance, commented: “The £50 minimum per month saving is very modest and borrowers who save only this amount won’t get anywhere very quickly, given the level of deposit required. Saving this minimum per month would take 16 and a half years to raise £10,000 to qualify for the £1,000 cashback, so borrowers need to be realistic. However, the rate of interest earned on savings and the cashback element compare favourably with similar deals offered by rival lenders.

“It remains to be seen whether the credit scoring will be extremely tough. One of the complaints frequently made by those looking for high LTV deals of 90 per cent or above is that they are rejected even when they are good applicants. Skipton recently said that only 25 per cent of applicants are accepted for its 95 per cent LTV deal, which could mean an awful lot of disappointed applicants.”

On a brighter note, the new deal restores the link between saving and buying. This disappeared from many mortgage lenders’ business models before borrowing got entirely out of hand and led to the global credit crisis.

Readers old enough to remember the housing market before the 1980s may recall that borrowers back then had to make regular deposits in order to become eligible for loans. So Nationwide’s new offer can be seen as a case of ‘back to the future’ and a return to common sense after the excesses of the credit boom.

Source: ' Telegraph '

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