Fixed rates have gone up?..... seriously!

Thrugelmir

zagfles said:

princeofpounds said:

Perhaps I can help explain. When a bank lends out money, it needs to build in a number of components into its margins. The first is the cost of funding. Funding comes from a mix of sources, mostly customer deposits. But it is very strongly influenced by the BoE base rate. That has indeed gone down.

The bank also needs a margin to cover its anticipated cost of risk on that type of loan. This is the amount of loans they make that go bad and are not repaid. The banks need to be able to cover this so they can continue to pay all their depositors. Given the huge economic shock, projections of the cost of risk have understandably gone up.

The bank also needs to factor in a decent return on equity. To exist as a bank, shareholders need to put in equity capital. To grow the bank and credit available to the economy, shareholders need to be incentivised to leave profits in the bank to build up equity capital further. Equity capital exists for a few different reasons, but one of the main reasons is to ensure that if the cost of risk calculations turn out to be an underestimate, there is still some money in the bank to keep depositors whole. Shareholders are the first people to lose money when a bank makes a loss, and if they were not compensated for that risk, no-one would put equity into a bank. The 'cost' of this equity capital to the bank has also gone up. Partly because of the general uncertainty over economic conditions - the standard risk models don't really incorporate pandemics and so are less reliable than normal - and partly because other equity investments have all got a hell of a lot cheaper and so the 'opportunity cost' of bank equity is higher.

So far, the second and third factor appear to outweigh the first factor. That's one reason why the rate cut was so appropriate - if it had not happened, you would be facing even higher end rates. It's probable that as we move closer to something resembling normal, and the banks can see evidence of how the economy is developing, the second and third factors will become less important, and end mortgage rates will drop again. Then the BoE will decide whether to keep base rates as they are or raise them, although I suspect we are still quite a distance from that decision being made! 

OP was talking about Nationwide so equity isn't applicable, Nationwide is a mutual with no shareholders.

It'll be all down to risk. In the current environment there is a big risk of a sustained economic downturn which increases the risk both of the mortgage holder losing their job, and also house prices plummeting which could mean negative equity, ie the house is worth less than the loan.

You'll probably find lower LTV mortgages (eg 70% or less) aren't affected much if at all.

The Nationwide is a bank and will have to conform to the laid out requirements for capital reserves etc. In order to sustain itself through challenging financial and economic conditions. Like all the other major banks the Nationwide has had to pass all the BOE stress tests. Fortunately UK banks are better equipped in broad terms to weather the current crisis better than their US or European counterparts. 

nyermen

Thrugelmir said:
The Nationwide is a bank and will have to conform to the laid out requirements for capital reserves etc. In order to sustain itself through challenging financial and economic conditions. Like all the other major banks the Nationwide has had to pass all the BOE stress tests. Fortunately UK banks are better equipped in broad terms to weather the current crisis better than their US or European counterparts. 

Fortunately, yes, I wonder where we would be if 2008 hadnt happened.  Nationwide looks reasonably healthy under the Annual Cyclical Scenario (ACS) (https://www.bankofengland.co.uk/stress-testing/2019/bank-of-england-stress-testing-results for the really interested).  It included scenarios like - most relevantly - a 33% drop in house prices.  Ie. Anything over 66% LTV becomes under pressure...

zagfles

princeofpounds said:

zagfles said:

princeofpounds said:

zagfles said:

OP was talking about Nationwide so equity isn't applicable, Nationwide is a mutual with no shareholders.

It'll be all down to risk. In the current environment there is a big risk of a sustained economic downturn which increases the risk both of the mortgage holder losing their job, and also house prices plummeting which could mean negative equity, ie the house is worth less than the loan.

You'll probably find lower LTV mortgages (eg 70% or less) aren't affected much if at all.

Equity does apply. A 'mutual' is just a different type of shareholder - customers are 'members' who have an equity-like interest in the mutual society. Apart from the ownership and the governance structure, it's basically equity by another name. Check out their results presentation and you'll see plenty of reference to it; e.g. CET1 stands for Common Equity Tier 1 - a regulatory definition of equity - and they actually have proportionately much more if it in their business than many of their peers. Or the 'total members interest' component of 'capital & reserves' in their balance sheet is equity capital by another name.

https://www.nationwide.co.uk/-/media/MainSite/documents/about/corporate-information/results-and-accounts/2019-2020/Interim-Results-Presentation-2019-20.pdf

To be frank, most large mutual organisations don't behave that much differently to limited companies. Often they tend to tolerate earning a lower return on capital, but the benefits that would be paid out in larger shareholder dividends then go to members through slightly cheaper products. That's why back in the 90s, when many building societies were de-mutualising, that members got what appeared to be a disproportionate pay-out as they sold their 'shares'.

You were talking about shareholders needing to be incentivised etc, that doesn't apply to Nationwide. No Nationwide member receives profits from Nationwide and no Nationwide member can sell their "shares". There is no need to incentivise Nationwide "equity holders" in the same way as shareholders of a bank who get dividends and can sell their shares. In fact Nationwide insist on a charity declaration for new members, that if they could ever cash in their equity (ie demutalisation) they have to give their proceeds to charity.

"Total member's interests" might be equity in theory, but not in practice, ie it's not assets any individual member can cash in or a value any individual members would be assessed as owning for any purpose (eg capital for means test benefits, divorce proceedings, inheritance etc).

No it absolutely is equity in practice. That’s why it counts as regulatory equity capital. The fact that Nationwide has an unusual way of distributing surplus retained earnings (essentially through loyalty bonuses rather than dividends) or an odd equity capital structure doesn’t change that.

Equity capital doesn’t need to pay conventional dividends. Equity capital doesn’t have to be transferable through share sales. Sure it’s a bit weird when it’s done in a non-conventional way.

Anyway, if you don’t believe me, look at Nationwide’s 2018 annual report (2019 not out yet it seems), page 178/179. 6 different types of equity are listed under members’ interests. General reserves is the largest (aka retained profits). Then core capital deferred shares. Then ‘other equity’. See here for an outline of the CCDS instruments (who get paid about a quarter of net income) https://www.google.co.uk/amp/s/www.thisismoney.co.uk/money/investing/article-2514327/amp/Nationwides-special-shares-pay-10-25--buy-worth-it.html

Anyway, there’s a reason Nationwide have to qualify their website statement of ‘having no shareholders’ with ‘(in the way that banks do)’. Because they do have shareholders, just not in the way banks do.

As for the issue of ‘incentivisation’ - it’s a much broader thing than just getting paid dividends. Out of time so I’m not going to get into that right now and that’s probably enough rambling for one evening.

I didn't know about the "special shares", they look a bit like traditional share equity, so might apply to that group. But the point is, regardless of the technical status of normal members' equity, normal members aren't incentivised by their supposed "equity" in the same way as bank shareholders are.

I'm a Nationwide member, so I have a theoretical equity stake. But that doesn't motivate me to do anything at all different to what I'd do if I had accounts at a normal bank (ie was just a plain customer with no equity stake). I choose Nationwide products based purely on normal consumer decisions only, ie does this product provide what I want and is it good value.

The supposed equity stake I have with Nationwide does not make any difference to my decision, and I can't believe it's any different for the vast majority of other customers, or "equity holders", especially since the charity declaration all new members have to agree to.

Crashy_Time

Mark4444 said:

1.94%. Even my financial advisor was a little perplexed - I get everyone needs to make money, so maintaining the rate I can understand, but increasing it will directly impact the housing market which is the backbone of the economy.  

Still low, great opportunity to pay down debt.