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Remortgage values rise as homeowners cash in on base rate cut

  • 27/08/2020
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Remortgage values rise as homeowners cash in on base rate cut
Homeowners remortgaging between April and June increased the amount of money they withdrew from their homes compared to quarter one, enticed by the base rate cut in March.


Analysis by LMS and the Centre of Economics and Business Research (CEBR) of the remortgage market found that while the number of remortgage approvals fell by 30 per cent between quarters one and two as the lockdown restrictions suspended the market, the value of remortgages rose.

Using its Remortgage Healthcheck Index to measure different types of activity and sentiment in the first and second quarters of the year, the remortgage approvals indicator highlighted an increase from 47 to 59.

The index uses different indicators to measure activity in the remortgage market. Scores between 40 and 60 are considered neutral and a score below 40 is considered negative.

According to LMS, the increase in the value of loans was likely caused by homeowners taking advantage of lower interest rates after the Bank of England cut its base rate to a record low of 0.1 per cent in March.

LMS’s own data showed that 45 per cent of remortgagers in the first half of the year increased or maintained their overall loan size.

Nick Chadbourne, chief executive at LMS, said the sharp rise was “particularly promising” despite overall volumes being down.

He said: “This activity indicates that lenders are regaining confidence, even if they are testing the waters with a reduced number of loans initially.”


Borrowing costs fall

As the base rate fell, so too did the borrowing cost indicator to its lowest value since Q3 2019.

The decline in the central bank rate resulted in a 3.3 per cent reduction in the average cost of a fixed-rate mortgage deal.

Despite this, spreads between the average fixed-rate mortgage cost and the cost faced by lenders to borrow for an equivalent period rose in both Q1 and Q2.

“The borrowing costs indicator shows a decrease to the average cost of a fixed-rate deal, which is further positive news for borrowers,” said Chadbourne.

“While the rising spreads in this indicator reveal that the full benefits of a base rate cut aren’t being fully passed onto borrowers, we wouldn’t expect that to be the case just yet, as lenders remain cautious for the short term.”


Homeowner equity down

As house price growth turned negative between April and June, the homeowner equity indicator dropped to zero from 55 between the quarters, the largest decline across all indicators.

Chadbourne said: “The outlook for this indicator remains unsettled, despite the rise in house prices fuelled by pent up demand, according to the latest data from HMRC.

“However, there is still a prediction of further falls as demand plateaus and government support schemes, such as the furlough scheme, come to an end in Q4.”

Overall the Remortgage Healthcheck Index recorded a small decline of 7 points from 55 to 48.


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