Update on the new Nationwide fixed rates
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Nationwide is launching new one year fixed rates for purchasers and new four year fixes for both purchases and remortgages tomorrow, resulting in it offering a choice of one, two, three, four and five year fixed rates for purchases and the same options except for one year for remortgages.
There is also a new four-year fixed rate product transfer option but more about this later.
To its credit Nationwide is one of the minority of lenders who offer existing customers with little equity fixed rate product transfer options at competitive rates.
But many of these borrowers will switch without getting independent advice and so it is blogs like this which can highlight some points these borrowers should consider.
The key point here is that Nationwide has two SVRs with rates currently 1.49% apart and existing customers as well as new customers now revert to the higher rate if they switch to a new deal.
This is an important additional factor to consider, especially for existing customers, which does not apply to the other lenders offering good product transfer rates.
The basic choice for the large minority of Nationwide customers who are either currently paying its old SVR (2.5%), or coming to the end of their current deal and reverting to it, is to stay on the SVR if they prefer a variable rate for the time being or switch to a fixed rate for longer than one year if they prefer the security and easier budgeting provided by a fixed rate.
The advantage of staying on the SVR is that there are no costs involved, it is the joint cheapest SVR in the market, and there are no ERCs, leaving borrowers free to switch to a fix if and when they consider the time is right.
The advantage of the fix is obviously stability of payments and being able to budget but one year doesn't provide stability for very long, or offer any insurance against rates increasing in the medium term, and I think that to make it worth giving up the right to a very attractive (in the current market) SVR one needs to switch to a fix for much longer than a year.
It is worth noting that although the 3.59% one year fixed rate for product transfers up to 95% LTV is 0.4% cheaper than the best rate Nationwide offers for a one-year fix for purchases, the situation is reversed with its four year fix.
Here the cheapest rate for movers is 5.28% (up to 60% LTV) but the cheapest product transfer rate is 0.3% higher at 5.58% (up to 60% LTV) and the rate for existing customers switching whose LTV is between 85.01% and 95% is 7.28%.
Nationwide actually offers the same product transfer fixed rates for all LTVs up to 95% on its one, two and three year fixes but has four tiered rates, depending on LTV, for its four and five year fixes.
This results in a borrower on 95% LTV being able to switch to an excellent 4.49% fixed rate for three years but having to pay 7.28% if they want a four year fix or 7.48% for five years.
Such a differential makes it completely pointless for such borrowers to take the four year, or indeed the five year, fix.
For example someone switching to the 4.49% three year fix could afford to pay 15.65% in year four before they would be worse off than if they had switched to the 7.28% four year fix.
Nationwide say that the two and three year fixed rates are the most popular for switchers and that is why they offer the a single rate for these terms, as well as the new one year fix, all the way up to 95% LTV.
But I think this is a chicken and egg situation. The reason Nationwide’s higher LTV customers have been choosing a two or three year fix will in many cases have been heavily influenced by the fact that they effectively get the 60% LTV rate, whereas for the five year fix, and now also the new four year fix, they pay the much higher tiered rate.
If Nationwide want to test my theory it could, of course, offer a single rate for switchers on their four and five year fixes as well as the shorter terms to make it a level playing field.
It will already have suffered from the regulatory requirement to set aside additional capital to support those mortgages now on higher LTVs and so there is no additional cost from a capital adequacy point of view.
Furthermore the risk of such clients defaulting will be reduced if they switch to an affordable longer term fixed rate, compared to the risk of either staying on SVR or coming off a shorter term fix when interest rates are rising.
*The 1 year fixed rates for purchases, both for existing Nationwide customers moving home and new customers, are 3.99% up to 60% LTV and 4.39% up to 75% LTV, with the same £495 arrangement fee as the product transfer deal.
NOTE. The term remortgage is often abused, with many people referring to a borrower not moving home but taking a new deal from their lender as remortgaging. This is not helped by some lenders using the term internal remortgage. The definition of a remortgage is changing your mortgage provider without changing your property. There is more than one term for people taking a new deal from their lender without moving home and Nationwide use the term “switcher.” A convenient generic term is “product transfer,” which is the term I normally use.
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