Remortgaging has been a topic of great discussion and debate over the last couple of years as more and more lenders have entered the market, hoping to achieve higher levels of business.
Gone are the days when borrowers remained with a lender for the life of their mortgage and took the rise and fall of rates on the chin. The market has evolved almost full circle to favour borrowers over lenders in terms of price as well as the choice they are offered.
A mortgage has always been the largest financial commitment most people will ever undertake, but what has proved surprising is that historically people pay very little attention to their mortgage after arranging it. In fact to remortgage or to release equity from your property was often viewed with stigma ‘ that something was wrong with your finances. However, this all began to change when lenders started to offer better rates to prospective new customers. Existing borrowers began to feel neglected as they were losing out, and so remortgaging naturally evolved as the solution.
Even when lenders started to offer their new rates to those that wanted to remortgage, borrowers were still put off. It was considered expensive to remortgage. There were valuation fees, legal fees and arrangement costs that all had to be met by the borrower. It was not until 1999 there was a big shift in the market, when a number of lenders started to offer fee-free remortgages which allowed borrowers to switch lenders without paying a penny.
Since then, the market has witnessed a rapid expansion, with increased borrower awareness fuelling it even further. Today most local, national and trade newspapers have dedicated personal finance sections that have made a conscious and concerted effort to educate their readership.The popularity of these sections is growing all the time as people realise the potential benefits of being financially aware. Then there is the internet with a huge number of websites providing financial information for the benefit of the general public ‘ usually all for free.
In addition to the internet and the press, the full picture is not complete without mentioning mortgage brokers who continually extol the benefits of moving your mortgage. The fact the broker market has proliferated over the last few years can only be seen as a good thing for consumers.
To see precisely how remortgaging has grown we need only look at the historical data provided by the Council of Mortgage Lenders. In April 2000, remortgaging made up 24% of gross mortgage lending ‘ in financial terms a total of £2.3bn.
Compare this to figures for April of this year and we see an immediate difference. Remortgaging accounted for 41% of gross lending which totalled £6.9bn, a three-fold increase in only two years. Of course house price inflation must take some credit for this, but it is clear that borrowers are becoming more aware of the cost-savings that can be made by swapping lenders.
However, despite it’s apparent popularity there is still much room for improvement. At the end of 2001, we carried out some research with NOP and found some interesting, if slightly alarming, facts about the habits of the nation’s borrowers. We discovered homeowners up and down the country are missing out on saving hundreds of pounds on their mortgages. A staggering 52% of those with mortgages who responded to our survey stated they were currently on a standard variable rate when there are much better products available. If you combine this with the fact 42% of mortgage holders would pay absolutely no redemption penalties should they choose to switch, we will see there is plenty more room for the market to expand.
However, for lenders, the concept of expanding their business by marketing remortgage products is now beginning to backfire.
Lenders initially saw massive increases in their mortgage books going into the remortgage market, but have recently started to see the effect of their own existing customers re-mortgaging to other companies. The net effect of this is their mortgage books are no longer growing and now it is too late to turn back the clock. The market has been made for the consumer to remortgage, with fee-free deals, rapid remortgages and the increased competitiveness in the market, all leading to lenders experiencing huge losses of customers from their profitable back books as those customers are tempted by attractive offers from other lenders.
The mortgage war last year was a prime example of lenders being proactively trying to protect their existing customer base. Halifax, Nationwide, Abbey National and Cheltenham & Gloucester have all introduced new variable rates for existing customers that were lower and better value for borrowers.
Other lenders such as Northern Rock, Nationwide and Bristol & West made their entire new customer product range available to existing borrowers. All this was great news for the existing borrower, but for the lenders it meant writing off millions of pounds in future profits.
In fact customer retention is a growing sector within the lending market, albeit at the expense of the lender. The good news for borrowers who are free to walk away is that it is getting more likely that if you ask for a better deal, you are going to get one.
The devil’s in the detail
However, we argue that borrowers need to beware of what they are doing.If they do not seek independent advice, they should watch out for a catch. Lenders have tried many tricks in the past with products that look good at first sight, but the devil is in the detail.
Many products in the mid to late 1990s carried heavy redemption penalties that locked borrowers in with little or no flexibility and without impartial advice it is all too easy for them to get caught out. Once locked in it is usually impossible to remortgage without paying a heavy penalty, so if the borrower chooses the wrong deal then they are stuck with it.
It is unlikely we will see the return of the 1990s’ style products available on the general market, as many borrowers and most brokers are all too aware of the pitfalls of these products. However, they may catch a few borrowers out.
The market has been driven by the consumer over the last few years and so it is likely we will see more flexibility and even cheaper rates as lenders continue to fight for market share. Remortgaging is still a massive untapped market as our survey showed with 42% of borrowers free to walk, yet many don’t.
So while awareness is growing, there are still many people who rarely read financial publications at all, for whom remortgaging is a strange and probably misunderstood concept. However, it is exactly those borrowers who need to know about remortgaging and should be reading articles such as this. So if you have any clients who you think this would help, so we can reduce the 42% to a lower figure, pass them this magazine, you never know they might even thank you for it.
But with remortgaging remaining at such a high level is the market in danger of implosion? It has become clear, from a consumer’s point of view, there is little danger of the current competitive market disappearing. But whether or not some lenders are forced out of the market remains to be seen.
David Bitner is technical mortgage manager at The MarketPlace at Bradford & Bingley
The remortgage market was kick-started in 1999 when lenders started introducing fee-free remortgages.
Remortgage levels have tripled in the last three years.
42% of borrowers can still to remortgage to a lower rate, suggesting the market is likely to grow further.