Nationwide has dropped a bombshell recently by announcing a 1.5% rate rise for any mortgage attached to a buy to let property which has been let for three years or more.
With the Nationwide base rate mortgage currently set at 3.99% this represents a 38% rise in mortgage costs for those buy to let investors on the Nationwide BRM mortgage.
Lets say that again – Nationwide will be increasing their mortgage rates by 38% soon. Ouch!
I know that Nationwide are currently not charging more “commercial” rates for their residential mortgage customers who subsequently let out their house (mostly because they cannot sell it, even if they want to) and I also know that Nationwide are giving these customers 3 years grace before hitting their customers with this large rate rise, but how can they justify such a large increase?
Well, Nationwide say this “The revised rates and charges help to ensure that the costs of the services we provide are met by those that use them, rather than the membership as a whole.”
They then go on to say “When properties on a Nationwide residential mortgage are rented out we too experience this additional risk and administration costs and it is only fair that those people who rent out their property should meet these additional costs rather than the membership as a whole”
When you think about it, these reasons do not really hold water because:
- They are only raising the rates for properties that have been let for three years or more. Well presumably the mortgage has been paid month by month during this time, otherwise Nationwide would be foreclosing on that property, so at the three year mark it seems that risks attached to that rental are actually reducing as there is a three year history of successful mortgage payments.
- What increased administration costs? Sure it might take an hour or so to process the paperwork when the property owner informs the Nationwide that they intend to let the property. Well, that cost will be covered by the new £50 additional “letting application fee” that the Nationwide will also impose.
There is no way that Nationwide can justify a 1.5% rate rise on every months payments by increased administration costs and risk. In fact I think that they may be increasing risk to themselves by this measure and here’s why.
The 1.5% hike in rates will mean that someone with a £200,000 mortgage will pay an extra £250 per month and this is at a time when when mortgage rates are low. What happens when mortgage rates start to increase again, which they will either because of increased interbank lending rates, or a rise in the base rate to combat the high inflation that the UK is experiencing?
For someone who is renting their house on narrow margins, this additional £250 monthly cost could force them into loss, making the let uneconomic. That landlord will either try to increase rents, which may not be feasible, or try and sell the property, which may be difficult to achieve also, particularly if there is a sudden influx of sellers on the market.
It is therefore more likely that a landlord will default on his mortgage with the Nationwide when hit by this large increase in mortgage rates.
So what is this rate hike really about?
I believe that it is a very easy way for the Nationwide to boost its profits – hitting customers who are soft targets, and who the Building Society obviously does not value as customers, even though they may have been with the Society for a long time and are very likely to have a good repayment history.
This punitive rate rises will take effect from 1st December 2010. That gives any landlord affected by this 6 months to find a better deal. Borrowers affected by this news should vote with their feet and take their business elsewhere.