Real Estate

Rush to remortgage ahead of Brexit


Remortgaging is all the rage. As the uncertainties of Brexit continue to shroud the UK’s economic outlook and to damp activity in the property market, homeowners are keener than ever to refinance their home loans.

Amid the political gridlock, banks and building societies are offering an array of strikingly competitive remortgage deals. With the base rate holding fast for now, borrowers want to lock down market-beating interest rates on their housing debt while they still can.

Remortgaging has become big business for mortgage lenders: in October it surged to £9.2bn, the highest level for nearly a decade, according to UK Finance, the representative body for lenders.

But the remortgaging decision is not always straightforward. Borrowers can choose from myriad options, including fixed-rate deals, trackers, discounted variable rates and offset mortgages. And that is before they have considered how many years to fix for — or the value of “special offers” or “cashbacks”, reduced or waived booking fees and other charges.

To help readers find their way through the thicket of choice, FT Money explores the central trends in the remortgage market, how they affect borrowers and what role brokers can play in the process.

Confidence versus cost

Fixed-rate mortgages have come to dominate the market in recent years. Brokers say that when customers now approach them for a mortgage or remortgage, the classic first question “What kind of mortgage do I want?” has increasingly been supplanted by “Which fixed-rate deal do I want?”

Offering the certainty of an agreed interest rate over two, three, five, seven or 10 years, fixed-rate deals give borrowers a measure of predictability over their finances. Economic uncertainty — and the current crop of enticing deals — are driving more people to pay for the privilege of knowing what their monthly outgoings will be over a set period. Another driving factor is the sense that interest rates may rise: the Bank of England has said a “gradual pace” of base rate rises in the medium term may be necessary, depending on the impact of Brexit.

David Hollingworth, director at broker L&C Mortgages, says variable-rate mortgages — commonly known as “trackers” — are less attractive in this environment.

“Unless you believe that the base rate is going to drop — and you could construct an argument for that — we are still at a very low point on fixed rates, so the upsides of a variable deal are fairly limited. Therefore it’s all been about fixed rates.”

Although average interest rates on new mortgages crept up slightly last year, competition between lenders remains intense and nearly all the major high street banks have cut rates across their fixed-rate deals since the start of this year. Those with a substantial chunk of equity in their homes who are looking to remortgage can get rates as low as 1.39 per cent for a two-year fix, or 1.85 per cent for a five-year deal.

Great lengths

Over the past decade, those borrowers who chose to roll over a succession of two-year fixes have done well, since low rates meant they could move to a similar or lower rate when their fixed rate expired. But the traditional dominance of the two-year deal is now being challenged by demand for longer-term fixes, typically of five years.

Graham Sellar, head of business development at Santander Mortgages, says the proportion of borrowers taking out five-year fixed-rate deals (compared with two-year offers) reached a record high in January.

“We’re now seeing over half our business coming in on five-year fixes,” he says. “It could be down to Brexit, interest rates, uncertainty in general, or the fact that five-year rates look attractive against shorter-term fixes.”

The narrowing gap between interest rates on two- and five-year fixed rates is another inducement to fix for longer. Research this week from finance website Moneyfacts found that the rate gap between the two types of fixed-rate deals had fallen to its lowest level in five years.

Rachel Springall of Moneyfacts says: “As it stands, the average two-year fixed mortgage rate of 2.5 per cent is just 0.41 [percentage points] lower than the current average five-year deal of 2.91 per cent, so despite average rates overall rising since the record lows seen in 2017 . . . the gap is smaller.”

Lenders are responding by introducing more longer term offerings, such as unusual seven-year fixed term deals. Ten-year deals, previously an untapped curiosity, are being snapped up in greater numbers.

Daniel Hegarty, chief executive of online mortgage broker Habito, says the number of 10-year deals the broker handled, though small, doubled between the first and second half of 2018. “We’re seeing both a move to fixed-rate deals and an elongation of the rate period.”

There are, nevertheless, a few things for borrowers to bear in mind if they decide to go for a longer fix. If you change your mind about the deal before the fix ends — or need to move home — you risk incurring a penalty for coming out of the contract, known as an early repayment charge (ERC).

On a five-year deal, ERCs are generally structured as 5 per cent of the mortgage debt if you break the deal in the first year, 4 per cent in the second, down to 1 per cent in the fifth. However, some lenders such as Santander charge 5 per cent all the way through the term.

Longer term deals are not without some flexibility, however. It is possible, for example, to reduce the overall size of the debt dramatically (and the interest payable) by making regular overpayments, typically up to 10 per cent of the debt every year.

If a borrower decides to move to another property before paying off the mortgage, it may sometimes be “ported” or transferred to the new home. Mr Hollingworth, however, adds a note of caution over making any assumptions on porting, particularly for longer-term deals. “There can be complications because your affordability will be reassessed at that point. If you’re borrowing more, or your circumstances have changed, you could find it’s not as straightforward as people think,” he says.

The broker question

When remortgaging, borrowers need to decide whether to use a mortgage broker, and if they do, what kind of broker. Borrowers are under no obligation to seek their advice and many choose to make their own decisions, or go “execution only”, in industry parlance.

But in a complex market with multiple variants on offer, brokers can help borrowers sift rates, weigh the value of special offers and provide speedy overall calculations on monthly payments as well as costs across the term of a mortgage.

Andrew Hagger, founder of consumer website MoneyComms, says: “I would always say to people use a broker. You’ll see the ‘best buy’ tables, but a lot of the time it will depend on the size and term of your mortgage as to which deal is best for you. Let them do the number crunching for you.”

There are several charging models. Some brokers make their money not from the borrower but the lender, in the form of a so-called “procuration fee”. Others charge a fee to the borrower, which could be a flat fee of, say £495, as well as a procuration fee, or ask for a percentage of the total mortgage amount.

Mr Hagger says there may be circumstances in which a fee is fully justified. “In the main you should not be paying a fee for a mainstream residential mortgage. When it comes to more specialist requirements, such as a subprime or non-vanilla mortgage, if it’s something quite complex it may be worth paying for that expertise.”

Using a broker may also help if you find yourself nearing the limits of affordability or have other special circumstances, such as being self-employed, since less time is likely to be wasted in approaching lenders with highly conservative lending limits or which are known to recoil from borrowers disclosing anything out of the ordinary.

“It’s about making sure you don’t apply to a lender who is never going to accommodate you and, worse still, will take two to three weeks to tell you it’s a ‘no’,” says Ray Boulger, senior technical manager at mortgage broker John Charcol. A string of rejections can also raise questions with subsequent lenders, who may ask about previous refusals.

One question for borrowers to a any potential broker is the extent of their coverage of the market. Some brokers offer mortgages only from a restricted range of lenders. Others will be able to consider the full range of loans on the market.

Another is where the best rates are to be found. In the past, there was often a substantial difference between the rate available via brokers and those offered to borrowers direct, or between those offered to new customers and those staying with their lender. As competition has intensified, these gaps have narrowed or disappeared. However, marginally different rates or fee-related perks may still be offered depending on how a customer has arrived at the lender.

Borrowers may find they get a very different reception from the big banks and smaller building societies. In tricky cases, building societies may be more willing to help, since they often retain manual underwriting processes rather than computer-driven models adopted by large high street banks.

Aaron Strutt, product director at broker Trinity Financial, says: “Smaller building societies are happier to do more complicated things. You’ll pay more — but you might get the money.”

Should I stay or should I go?

Borrowers are increasingly choosing not to switch to a new lender when the time comes to remortgage, but move on to a new deal with their existing bank or building society. Known as the “product transfer” option, this part of the mortgage market has been growing rapidly in the past few years as lenders are fighting harder to hold on to their customers, not just recruit new ones.

Last year, UK Finance published data for the first time on the size of the product transfer market, finding it amounted to business of about £38bn every three months. When figures for the last quarter of 2018 are finalised, the industry expects a total for 2018 of around £150bn — nearly twice as much as the £80bn remortgaging market, which records loans that move from lender to lender.

Ten years ago, there was little to stop customers with maturing mortgages from simply rolling on to a lender’s standard variable rate — a much higher rate than those offered under fixed or discounted deals — at the end of their deal. Then, lenders took few steps to communicate or persuade customers to find a new deal with them; now, they contact borrowers several months before the end of the deal and explain their options. Then, Mr Sellar estimates, two-thirds of these people would have moved to a different lender; now two-thirds stay.

Part of the allure of product transfers is that they do away with the need for paperwork, surveys and solicitors that come with moving to a new lender. Banks are also sweetening the deal by allowing their customers to switch to a new rate several months ahead of their date of maturity.

“What the market shows is that lots of customers are choosing to stay with their existing lender either to get a better rate straightaway or to have certainty of their rate when it matures,” Mr Sellar says. Like other banks, Santander has made sure customers can take this decision online; some 60 per cent of its product transfers now take place digitally, up from 20 per cent three years ago.

It is clear that lenders have become slick at exploiting customers’ preference for minimal hassle. But what price are they prepared to pay for that convenience?

Mr Hegarty of Habito says: “My only hesitation with internal product transfers is that lenders will not ordinarily go through an advised process. This puts the consumer at a disadvantage as they won’t have the opportunity to talk through their situation or to compare rates across the market.”

In the past two years, banks have taken steps to win over brokers to the product transfer market, encouraging them to include the bank’s current deals when advising a client on a remortgage (brokers will still receive a “proc fee” for this service, even if the borrower remains with the same lender). But Mr Hegarty’s point stands for those who choose to decline advice ahead of a product transfer.

A competitive future

What developments can borrowers expect to see in the mortgage market over the next few years? Unless the fog of uncertainty over Britain’s political and economic outlook suddenly lifts, long-term fixed-rate deals are likely to remain popular as a hedge against future interest rate rises.

But the lengthening of deals has other ramifications. Mortgage market experts are predicting that, in the absence of a surge in home purchases, the shift to five-year deals will trigger a drop in mortgage activity from 2020 onwards. Customers who would have remortgaged every two years will now be “out of the market” for more than twice as long. And while lenders will benefit from having more of their customers on longer-term deals, they will find it harder to supply themselves with new customers by prising them from the grip of other lenders.

This means that, if banks and building societies want to sustain their current levels of business, they will need to open up new markets or types of product, or become increasingly competitive.

Specialisation is one such avenue. Mr Boulger of John Charcol believes the need for lenders to go beyond their core markets will boost the prospects for “later life” mortgages. “It’s a small part of the market but it will become a bigger part as an increasing proportion of the mortgaged population gets older.”

Completing a remortgage online will continue to get easier, experts predict, though the disparate systems and lack of standardised questioning among lenders remains a barrier to marketwide tech solutions. While artificial intelligence has yet to conquer the mortgage process, Mr Boulger thinks it has potential to ease the burden of red tape that sometimes dogs the remortgage process — and may ultimately have a role in offering advice.

“A lot of people in 10 years will still welcome getting advice from a human being,” says Mr Boulger. “But I think it would be foolish to discount that artificial intelligence won’t develop sufficiently to mean some advice could be given using AI.”

When ‘best buy’ can end up costing more

High street mortgage lenders vie with each other to offer the lowest interest rates in order to ensure their loans come near the top of the “best buy” tables produced by finance websites and comparison sites. These tables can have a disproportionate influence on the decisions made by borrowers ahead of a remortgage, particularly where they are going it alone, without the advice of a broker.

Rates should be a key part of the decision-making process, says David Hollingworth, director at broker L&C, but it is also important to look at the overall value of a product since fees and other costs can make a big difference to a deal’s overall value.

Take the example of a £150,000 repayment mortgage over 25 years, in costings calculated by L&C.

Leeds Building Society currently offers an attractively low interest rate of 1.39 per cent on its two-year fix, with a booking fee of £1,999 and a free valuation. The costs are as below:

  • Monthly payment £592.18
  • Total over two years £14,212.32
  • Arrangement fee £1,999
  • Valuation £0
  • Legal work £300 (assumed cost)
  • Total £16,511.32

Now look at another two-year deal, this one from Platform, a broker brand of Co-operative Bank. It has a higher interest rate of 1.89 per cent over the fixed term, but charges no booking fee and throws in valuation and basic legal work plus £250 cashback.

  • Monthly payment £627.78
  • Total over two years £15,066.72
  • Arrangement fee £0
  • Valuation £0
  • Legal work £0
  • Cashback £(250)
  • Total £14,816.72

Over two years, therefore, the Platform loan at the higher interest rate will cost the borrower almost £1,700 less than the Leeds deal, in spite of the latter’s lower rate.

“There is some benefit in having a lower interest rate in that the amount owed on the capital balance will be lower than at a higher rate at the end of the two years,” adds Mr Hollingworth, “but that won’t be enough to outweigh the difference.”



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