Nationwide borrowers paying rock bottom mortgage rate

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 per cent above the 0.5 per cent Bank of England base rate, giving a current rate of 2.5 per cent.

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 per cent, 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 300m compared with if it was charging a standard variable rate (SVR) of 4 per cent, 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 per cent 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 per cent this week, while it is paying 2.99 per cent on an online saver, and up to 3 per cent 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.

The group said it had halted big falls in its profit margins thanks to an improvement on the savings side, with the net interest margin remaining relatively stable at 0.81% in the half-year against 0.83 per cent the previous six months.

Having such a high proportion of customers on its base mortgage rate is also thought to have encouraged the group to continue lending, at a time when mortgage lending in the building society sector is contracting sharply, as it seeks to rebalance its mortgage book.

Nationwide has had 79 appearances on the Moneyfacts best buy mortgage tables since the beginning of this year, compared with just nine mentions during the whole of 2009.

The group has also introduced a number of offers for its existing mortgage customers who want to remortgage, including 300 cashback, and a product to help people who are in negative equity who need to move house to do so.

While Nationwide expects customers to continue taking advantage of its low BRM until the outlook for record low interest rates changes, it believes profits will rebound once borrowing costs begin to rise.

Graham Beale, chief executive of Nationwide, said: "A progressive return to a more normalised interest rate environment in future years will result in a strong upturn in the overall level of group profitability."