Nationwide mortgage rates rising

payless

MM- well actually , not in this case, existing borrowers can also take their pick of these and the numerous others ( the 9 possible combinations I mention are just the 2 yr fixed range)


fixed, tracker, partly broke but fixed.....

MarkyMarkD

Joe_Bloggs wrote:

I thought there was some king of requirement for building societies to be funded substantially by savings deposits rather than borrowing on money markets. This could just be nineteenth century wishful thinking. Regulatory bodies don't help by publishing ammendments rather than the ammended plus the original regulations together.
I withdrew £4K from the Nationwide when they stitched up eSavers. There has been a lot of 'competetive' saving rate cutting and the raising of fixed rates throughout many financial institutions. On top of that too are outrageous fee increases !
J_B.

It doesn't work like that, Joe.

Even if the building society is funding its mortgages in the main from savings, the savers don't (normally) want fixed rates. (Fixed rate savings are a tiny proportion of the savings market).

If they lent at fixed rates, but paid the savers variable rates, they would be stuffed if variable rates increased as the mortgage customers would keep paying the lower fixed rate. So they have to cover this risk, by entering into a swap on the money markets.

The swap means that the building society agrees to pay another institution a fixed rate, and to receive variable rate interest. They then eliminate the risk of rates rising or falling - they know that their margins are guaranteed and secure.

E.g. (without swaps)

Nationwide lend at 4.59% fixed and pay savers 4% variable (say).
They make 0.59% at the moment so they're happy.

Savings rates increase to 5% (say) and the fixed rate stays fixed. Nationwide lose 0.41% and go bust. They're not happy!

(with swaps)

Nationwide lend at 4.59% fixed, and enter into a swap under which they pay 4.89% fixed (say) and receive 4.5% variable (say). They pay the savers 4% variable as before. They make 0.2% so they're sort of happy. (Not as much profit as they'd make without the swap, but still a profit of sorts).

Savings rates increase to 5% (say) and the variable rate under the swap increases to 5.5% variable (say). Nationwide still make 0.2%:

+ they receive 4.59% fixed
- they pay 4.89% fixed
+ they receive 5.5% variable
- they pay 5% variable

= 0.2% as before. The swap eliminates the risk of rates moving.

Hope that helps!