Remortgaging is becoming an increasingly popular route for homeowners seeking better rates on their loans and looking to release equity from their property. And as October saw uptake climb to an 11-month high, 2013 is expected to see remortgage applications soar further. Rebekah Commane reports
The remortgage market has seen a sharp turnaround since August, when this sort of borrowing was at its lowest level for 12 years.
Generally, people choose to remortgage in order to lower their monthly loan payments, benefit from lower interest rates, or to release some of the equity in their home to use elsewhere.
Anyone who has an existing mortgage can look into remortgaging, so long as they meet the criteria set by their new lender. And any financial adviser will, of course, recommend doing plenty of research to secure the best possible deal.
It can be particularly appealing to remortgage if a homeowner has reached the end of a fixed-rate period or discounted deal and will most likely be switched to a standard variable rate with their existing mortgage provider.
It’s advised to allow time for the change to kick-in, so start planning about two to three months before your current rate ends and check whether charges will be incurred for paying off your mortgage early.
Statistics
According to the latest statistics from the Council of Mortgage Lenders and data from the Bank of England, remortgages now account for almost a third (31 per cent) of mortgage lending, with gross lending at £3.1 billion in October; £0.2 billion higher than the previous month.
In terms of the sums being borrowed, the average remortgage amount rose by over £750 to £138,200 in October, the highest it has been since December 2008 and up 5.7 per cent on the same time last year, when it averaged at £130,763.
The latest figures from conveyancing and remortgage specialists, LMS, indicate that the total number of remortgage loans advanced increased by 19.5 per cent in October, up from 24,600 in September to 29,399, just short of the 31,200 advanced in October 2011.
Commenting on these figures, Andy Knee, chief executive of LMS, says: “October showed a second consecutive month of growth in the total value and number of remortgages as people took the opportunity to snap up the good deals that are now available – uncertain about just how long they might be around.
“Factors such as the government’s Funding for Lending Scheme and increased lender competition have acted as a positive influence on the market and attracted homeowners who were otherwise happy to sit tight on a lender’s standard variable rate.
“Renewed levels of activity in the mortgage market are feeding through to property prices, which are robust, and both of these will serve to further boost consumer and lender confidence.”
And new figures from HSBC estimate that 3.6 million mortgage borrowers could save £1,000 a year by remortgaging.
It estimates that 4.4 million mortgage borrowers are now on their respective lenders’ standard variable rate (SVR), averaging at 4.86 per cent.
The study suggests that these households have come off fixed or discounted rate mortgage deals, which were available two or more years ago and that, in principle, these SVR borrowers are able to remortgage to a better deal without paying the early redemption penalty that would have applied throughout their fixed or discounted rate period.
HSBC says that while better mortgage rates are often only available for customers with low loan-to-value ratios, there are an estimated 3.6 million SVR borrowers with LTVs below 85 per cent free to move to a better mortgage rate.
For a borrower, with equity of 15 per cent and a loan of £150,000, on a typical SVR of 4.86 per cent, moving to a two-year discount rate of 3.84 per cent would achieve an annual interest saving of £1,034. Collectively if the ‘free to move’ SVR mortgage borrowers could find just 0.5 per cent interest savings on their £301 billion outstanding loans, they could make a combined annual saving of over £1 billion in first year monthly repayments.
Peter Dockar, HSBC head of mortgages, said: “The UK mortgage market has 3.6 million SVR borrowers who can switch to a more competitive rate. Even those with equity of just 15 per cent could each save a potential £90 per month in interest payments.”
London, a remortgaging hub
In a study, LMS also found that homeowners in London are remortgaging more frequently than any other region as they look to manage their costs.
Property owners in the capital have the highest average remortgage loan amount of £215,098 and are remortgaging every 3.94 years, compared to the national average of 4.71 years.
Southerners also hold the greatest amount of property equity in spite of prices in this part of the country being the least affordable.
Commenting on the findings, Andy Knee explains: “That homeowners in London are remortgaging the most frequently is indicative of the desire to get the best possible deal for what is a sizeable mortgage. The capital has long attracted job seekers from across the country, as well as internationally, and many homeowners are reluctant to commit to longer-term mortgages in view of early repayment charges should they decide to move in the meantime.”
Competitive rates
Brian Murphy, head of lending at the Mortgage Advice Bureau, told What Mortgage that the remortgage market had seen steady growth throughout 2012, helped by a number of factors, including the Funding for Lending Scheme (FLS).
“Lenders are under lending in terms of target levels so some have gone out aggressively with a view to capturing missed opportunities; and consumers are now more aware of the deals on the table in terms of what is good value.
“A lot of people couldn’t afford to remortgage until recently, but now there are great rates to be had and it is a fantastic opportunity for homeowners to lock in good deals on their mortgage payments, while the cost of living is increasing elsewhere. This is something they can have control over and feel secure with in a volatile economy.”
Murphy advised sitting down and doing a cost-benefit analysis before deciding to remortgage and warned that lenders have tightened their acceptance rates.
“Even something small, like having changed jobs recently, could put lenders off issuing a remortgage in this climate, so be prepared.”
It’s predicted that remortgaging could grow further, with an increase of as much as 25 per cent this year.
“British banks and building societies have been quick to sign up to the FLS and we expect homeowners to continue to reap the rewards of this in 2013,” Andy Knee predicts.
“Low LTV mortgages are the most attractive means for lenders signed up to the scheme to demonstrate increased loan availability for consumers, because of the lower demand they make on precious capital. For this reason we estimate that the remortgage market could see growth of as much as 25 per cent next year, albeit from an extremely low base. The government scheme can already be credited with generating some excellent deals for homeowners with healthy levels of equity, with a two-year fixed rate of 1.99 per cent now available from one lender on mortgages of up to 60 per cent LTV. However, there remains little appetite for new competitive mortgages above 60 per cent.”
The pros and cons
Michael Ossei, commercial manager in financial services at uSwitch.com, explains why consumers are turning to remortgaging and says there is a misconception among some customers that mortgages are difficult to get.
“Consumers are still very skittish – cash is tight; there’s a general concern that the base rate could go up at any time, leaving those on a standard variable rate floundering. In fact, lenders have been stealthily increasing their variable rates even though the base rate hasn’t changed.
“Many homeowners have seen this as ‘the writing on the wall’ and are keen to move to a fixed rate mortgage so that they know where they will stand for the next one, two or three years. Lenders have responded to this increased demand by bringing out some really enticing fixed rate deals and mortgage approvals were massively up in November.
“There’s another pressure on consumers and this is the fact that they are seeing the cost of essential household bills go up, while incomes are remaining static at best, and falling at worst. As a result, people want to have more control over one of their biggest outgoings – their mortgage repayments. And they can get this certainty by moving to a fixed rate deal.
“The other factor at play here is that mortgage rates are far lower than other forms of borrowing so there will be some homeowners seeking to lower their outgoings by shifting other debts onto a mortgage – obviously they can only do this if they have enough equity in their property.
“While this makes financial sense, it is also a risk as you are essentially taking unsecured debt and securing it against your property. Great if all goes well and you are able to keep up repayments, but potentially disastrous if you are unable to keep up your repayments.
“Likewise, there’s a strong emphasis at the moment on clearing debt. And with savings rates low, if you’ve already cleared more expensive debt, such as loans and credit cards, then it makes sense to pay off your mortgage early. Those who are already in a fixed rate mortgage might be content to make over-payments, but once their fixed-rate comes to an end they may well want to remortgage at a lower amount or for a shorter term.
“Finally, some consumers may simply be looking for a bit of financial respite and may want to change to an interest-only mortgage. While lenders have clamped down on these, there are still some available. People moving to interest-only will be in a minority, but it gives a strong sense of the very different factors driving the market currently.” wm
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