Nationwide's 125% loan-to-value mortgage: haven't we seen this before?
Are you underwater on your mortgage? According to Nationwide Building Society, you can borrow your way out of your losses. How? With a "125% loan-to-value mortgage".
Here is how it works.
1. Borrowers must come up with a 5% down payment on their new home.
2. Nationwide lends the other 95% of the cost of the new home.
3. Nationwide then extends the borrower up to an extra 30% of the value of the new home to help offset losses selling the old home.
Interest rates for this program are rather steep, starting at a fixed 6.73% for three years, or 7.48% for five years on the first 95%. If a borrower opts for the extra 30% Nationwide is willing to lend, the interest rates on that will run a fixed 7.23% for three years, or 7.98% for five years. The Bank of England base rate is currently 0.5%.
What could possibly go wrong? In the Sunday Herald, Iain Mcwhirter has a scathing Op-ed piece where he insists such practices will put British citizens right back in the situation of bailing out banks once this all goes bad. He cites historical data of housing prices dropping further as unemployment rises, and points to a projected 3.2 million Brits out of work in 2010.
A spokesperson for Nationwide told Bloomberg that she does not expect there to be high demand for this type of loan, but it will be a way to help out those who "have to move and are taking a hit on the sale of their home". And then a few months down the road, taxpayers will be bailing out more bankers yet again.