Nationwide says it has begun to stabilise its battered profit margins, but more than a third of its mortgage customers are still paying a rock bottom interest rate on their home loan.
The UK’s largest building society has one of the lowest standard variable rates – which it calls the base mortgage rate (BMR) – on the market at just 2% above the 0.5% Bank of England base rate, giving a current rate of 2.5%.
The society has always had a relatively high proportion of borrowers on its BMR, with around one in four mortgage customers thought to be paying this rate before the credit crunch struck.
As interest rates dropped and lenders tightened their credit criteria, the proportion of borrowers on the rate has soared to between 30% and 40% of its estimated 1.4 million mortgage customers.
The group took steps to address the issue last year when it said customers taking out a mortgage after April 29, 2009, would revert to its standard mortgage rate of base rate plus 3.49%, when their deal ended.
However, while a few borrowers reverted to this rate this summer, it will be at least April 2011 before customers who took out a two-year deal go on to the rate. In the meantime, having such a high proportion of borrowers on the low base mortgage rate is costing the group a significant amount.
It said its base mortgage rate customers were costing it £300 million compared with if it was charging a standard variable rate (SVR) of 4%, closer to the ones used by its competitors.
Nationwide raises three-quarters of the funds it uses to back its mortgage lending through members’ deposits, and while, like all banks and building societies, it is likely to have a large amount of savers’ money sitting in accounts paying low rates, the interest it is offering to attract new business is well above the 2.5% it is charging to its mortgage customers on the BMR.
The group is due to launch a market leading three-year fixed rate bond paying 4.5% this week, while it is paying 2.99% on an online saver, and up to 3% on a one-year e-bond – all significantly higher than the rate it is earning on the majority of its mortgages.
Nationwide also this week launched its Savings Promises, under which it pledges to tell customers how much interest they are receiving on their cash every year, while it will also give them information on better paying accounts available with the group.