10 minute read
Cover: Remortgaging Borrowers are buffeted
NERVY BORROWERS SEEK REMORTGAGES EARLY
Rising interest rates and cost-of-living fears spur property owners to contact mortgage brokers well before their current deals end, Simon Meadows writes
As interest rates have escalated over the past year, so too, it seems, have the jitters of mortgage borrowers. Brokers are reporting that their clients are seeking advice on remortgaging well in advance of the ends of their fixed terms, in some cases more than six months before – even before mortgage advisors contact them to revise their deals.
With the annual rate of inflation soaring, driven mainly by energy and food price hikes, the Bank of England has increased interest rates with worrying regularity since last December to what is now the highest level seen in years. This has left borrowers concerned that they may face eye-wateringly high mortgage repayments if they leave renewal too late. Further interest rate rises seem likely, with serious implications for the industry and potentially higher mortgage rates. This will do nothing, of course, to quell the fears of anxious property
owners, who are tempted to switch to a cheaper deal before rates peak.
Russell Clark, a senior mortgage advisor with Andrews, has witnessed a distinctive change in some borrowers’ behaviour. Where once he was making the first contact with his clients to remind them that their mortgage agreements were due to expire, now some are contacting him, many months earlier.
“Since we’ve had the increase in interest rates and increase in inflation, it’s becoming more apparent that clients want to do something earlier,” Clark said. “People are worried about the cost-of-living at the moment – as the song says, ‘the only way is up.’ In real terms, we have had low interest rates for a while because of low inflation and COVID, so we have been in an artificially low place.
“Clients are worried that over the next couple of years we are going to have issues, so they want the security of knowing that, if they can afford it [a fixed-rate mortgage] today, they can hopefully afford it over the next two, three, four years. They are looking at mostly five-year fixed rates.”
Clark has over 20 years’ experience in financial services and completes around 100 mortgages a year, of which 25 to 30 per cent are remortgages. “We tend to contact our clients, on average, about four months before [their terms expire],” he explained. “We have a CRM system that will drop someone an email saying, ‘Look, you’re coming to the end of your fixed rate, do you want to have
a chat to refresh what’s happening, what your thoughts, your plans are?’
“A lot more clients are actually contacting us a lot sooner, some of them even [sooner than] six months before. You have to say, ‘Look, I can’t do anything, the earliest I can probably do something is six months beforehand.’ A couple of lenders are starting to increase that time period, but I think that needs to be across the market so we can secure rates for our clients earlier.”
Clark is finding that some clients are prepared to pay a product redemption charge to exit their existing mortgage deals early, in favour of what they perceive as a recession-busting deal. “We’ve had some clients who have said, ‘I want to pay my penalty to get out,’” he shared. “We certainly wouldn’t advise that. Whatever that penalty is, normally thousands of pounds, clients sometimes want to do that for peace of mind. It sometimes doesn’t make financial sense; you point that out to clients. But if it’s their wish, then that’s up to them.”
In an increasingly volatile market, Russell Clark points to lenders constantly juggling and switching their products and the need to act fast before deals disappear. No-one, of course, knows how long this downturn will last, but some of Clark’s clientele remain optimistic, it seems. “I did a two-year fixed-rate this week for a client who genuinely thinks that this is going to be a short-term blip,” he confided.
According to the Office of National Statistics, of nearly 25 million dwellings in the UK, 6.8 million – 28 per cent – are owned with a mortgage or a loan, and with one in four homeowners in the UK estimated to be on a lender’s standard variable rate, (SVR) that’s likely a lot of nervous borrowers watching rising interest rates with trepidation. One thing’s for certain: many are not prepared to sit idly by and find themselves overwhelmed by unmanageable repayments.
“There has been a fundamental shift in the remortgage market over recent months from a passive to an active sale,” reflected John Phillips, national operations director at Just Mortgages, which has advisors throughout a network of more than 200 estate agents nationally. “Historically, thoughts of remortgaging would only surface when an existing deal was coming to an end and there was a passive attitude of ‘OK, what can I get now?’”
“This switch to the next best-available product was often with the same lender and only slightly more proactive than those borrowers who passively let their mortgage roll over onto a lender’s SVR. However, our brokers across the country have been reporting a significant surge in proactive remortgage interest for the past six months. This was motivated in part by the first rise in the current bank base rate in December last year, but in our organisation [also] through a proactive programme of brokers communicating with clients to make them aware of the options available to them.”
Phillips added, “In a rising interest rate environment with household budgets stretched by significant costof-living increases, the value of a well-timed remortgage has never been greater. Although borrowers typically wait until the end of a mortgage term to avoid early termination charges, our brokers are encouraging all borrowers to look at the fees in the context of longerterm value. Mortgage rates are rising daily and securing a product before it is withdrawn can offset any penalty charge. The remortgage market cannot afford to stay passive. Now is a time for action, and brokers need to be active in assessing the viability of remortgaging for their clients.”
On average, there are around 39,000 homeowner remortgages every month in the UK. Buy-to-let mortgage provider Landbay is based entirely online and, since its launch in 2014, has overseen £1.2bn in lending across more than 3,000 loans. It believes that the current market is making borrowers more conscious of lending rates.
“A whole generation of landlords and homeowners have never seen an interest rate rise until recently,” →
JOHN PHILLIPS
said chief operating officer Paul Clampin. “It has made borrowers increasingly aware of the rates of interest they are paying and what those may rise to, which is naturally creating a level of uncertainty.
“We saw a small number of applications made earlier in the year in which applicants were trying to book rates with longer completion dates before rates increased. The challenge for lenders remains being able to hold rates in a rapidly changing market where funding restrictions naturally dictate that there is a finite period of offer eligibility.”
He added, “Fortunately, 83 per cent of borrowers in the UK are on fixed-rate contracts. No doubt those on variable rates or whose fixed rates are coming to an end will be looking to find a fixed rate again as soon as possible.”
Remortgaging accounts for about 40 per cent of Access Financial Services’ business, according to CEO Karl Wilkinson. “With my own customers, they are contacting me seven or eight months before,” Wilkinson said. “They are saying, ‘Is it actually worth paying my redemption penalty, it might be a small percentage of the loan amount to fix something now, because God knows what’s going to happen in six months’ time.’ We have to be realists; we have to tell these customers the worst-case scenario as well as the best-case scenario. They really need to know what’s going on, what could happen, and prepare for it.”
Wilkinson, who’s been a mortgage broker for 17 years, founded his business in 2017. It has a 160-strong team of mortgage advisors across the UK. “There are a lot of people now, especially in the next 12 months, who will be coming out of their fixed-rate period, and they could find that their mortgage costs have potentially doubled,” he stated. “They can’t get anything as good as what they had 18 months ago. You’ve got customers who are generally a little savvier because they are now starting to think about their finances. They are thinking about utility bills and the cost-ofliving going up and they’re trying to work out ways of saving money. People are now starting to think, ‘What do I have to do to stay in my house?’ Life insurance and income protection sales have gone up.”
Wilkinson noted that some lenders are also trying to get ahead in the current market. “I think that lenders are being a little bit more aggressive in their approach to trying to get the customer earlier,” he said. “If lenders can cut out the broker, obviously they don’t have to pay commission.
“I would say to every single customer out there, whether they have got a broker or not, speak to someone. Speak to someone now, at least to get peace of mind and forward plan six months into the future. A “A whole generation of landlords and homeowners have never seen an interest rate rise until recently.... It has made borrowers increasingly aware of the rates” PAUL CLAMPIN
decent mortgage broker, a good-quality mortgage broker, should be helping these customers to plan – almost like a financial planner, looking at their whole finances to make sure that they’ll be OK. If you’re a broker, reach out to your customers, six or seven months beforehand.”
The outstanding value of all residential mortgage loans was £1,648bn at the end of Q2 2022, 3.8 per cent higher than a year earlier. Such is the volume of applications submitted currently, explained Karl Wilkinson, that it is taking months rather than weeks for a mortgage to complete. “A rate will be there one day and gone the next, and, in fact, lenders have been so busy that they can’t cope with the number of applications going in,” he emphasised. “It shows that people want to get their next two or five years fixed so that they know where they are.”
Tracker mortgages are to be avoided in the current economic climate, he said, but he supports fixing for the longer term. “If it was me personally, I would probably fix for five years,” Wilkinson advised. “We have seen more five-year fixes than two-year fixes, and I think a lot of that is because the volatility is going to be for more than two years.”
Wilkinson noted that some borrowers trying to navigate the current challenges are finding themselves falling short of the stringent criteria for a new deal. “I don’t think the government and lenders are doing enough to help people who are in the mortgage trap,” he suggested. “What I mean by that [is] there is a need to remortgage but they can’t afford to remortgage because their income has dropped or something like that. But they have clearly evidenced that they make their repayments. So they might end up being stuck on standard variable rate.”
He sounded a final note of caution for the powers-that-be in terms of the economy: “If the Bank of England, or even the lenders, increase their rates too much, that could be the straw that breaks the camel’s back.” M I
