New Lending Scheme from Nationwide Is Not That Bad Afterall

 Last week we wrote about Nationwide Building Society's 125% home loan scheme here. Most of the property industry was aghast and viewed as a possible sign of return to bad old days that caused credit crunch in the first place. Many were quick to link the scheme with the 'Together' loans that ultimately led the Northern Rock to sink.

As the details have emerged over the weekend, the scheme does not seem that bad after all. Especially of the presence of negative equity can hamper the recovery on housing market.

Negative equity is the problem only when you need to move
Various experts have their views on how many people will end up in negative equity once the housing crash is over. The estimates range from an optimistic 1 in 10 to a drastic 6 in 10.

Negtive equirt is a scary-sounding phrase. But it is not such a problem if you are not planning to move at all. If you are going to stay put for a foreseeable future then why do you care i fthe price of your house is temporarily less than the mortgage you owe? As long as you are paying the mortgage on time every month, it shouldn't bother a home owner.

However, the negative equity becomes more of an issue if you must move. In that case you need to sell your house to buy another one in a different area. But if you owe more to a lender than the selling price of a house then lender will want to get all its money out before allowing you to sell.

It will also mean that you may not be able to raise deposit for your next property.

This is where Nationwide's deal will help
Building society will lend you enough to pay off any shortfall on your existing property (negative equity) and also lend you the deposit (5%) so that you are able to sell and then buy your next house.

This will mean 2 transactions have taken place in a housing chain - a help to the housing sector.

But this scheme is not for every one. First, you must be an existing customer of the Nationwide. In other worss, they know you and your payment record. Secondly, you must be able to afford the new (and bigger) loan.

The mortgage rates, starting at 6.73% are painfully expensive. So this is only for the brave heart - the ones who are most motivated to move.

There are risks for the Nationwide but it is charging a handsome premium for 'helping its customers' to move - especially when the base rate is a mere 0.5%, and even more importantly, swap rates are less than 3%. Society is clearly taking more than enough margin to cover its risk.