125% is back….sort of

Nationwide has hit the headlines with news that it can offer homebuyers a mortgage of as high as 125% of the property value. This initially sounds like a return to the lending practices of the “pre-crunch years” and the now infamous Northern Rock Together mortgage. Whilst the Together 125% deal actually served some borrowers pretty well it has become synonymous with the carefree credit conditions of 2007. However when you look closely at the Nationwide proposition it is a world away from replicating the Northern Rock product. It is designed to help existing borrowers that need to move home but now find themselves in negative equity, as their property value has fallen to the extent that it is less than the outstanding mortgage. Nationwide allows all existing customers moving home to borrow as much as 95% of the property value albeit at higher interest rates. In this scenario the borrower still needs to put in at least a 5% deposit but they can also borrow an amount to cover the negative equity, although this is charged at an even higher rate. Is this a return to a credit frenzy? I don’t think so. The reality is that this will only have any relevance to a small niche of borrowers that really need to move, perhaps to relocate for a new job or to accommodate an expanding family. In addition Nationwide will still be putting the borrower’s ability to service the mortgage under the microscope and I expect a Grade A credit score to be a pre requisite. This at least gives some option to those that have a genuine need to move. However the vast majority will undoubtedly prefer to keep their head down, stay put and concentrate on reducing their mortgage debt. The reality is that the mortgage market is a long way from freeing up sufficiently to serve the needs of many borrowers, let alone hurtling back to pre-crunch levels.