But we have seen evidence from the Bank of England that remortgage activity is picking up. Lending for remortgages outperformed house purchase activity year-on-year. Approvals rose by 22% in May compared to the same month last year while house purchase approvals crept up by just 1%.
With this marked increase in momentum are we about to see the remortgage market quicken its pace from a casual stride to an all out sprint or are there still many barriers holding borrowers back from releasing equity from their homes?
This week our panel of experts are looking at what obstacles homeowners face when it comes to remortgaging.
Payam Azadi, director of Niche Advice, says changes to lending policies since the onset of the financial crisis have stifled remortgage activity, with swathes of customers now subject to much tougher affordability calculations and still sat on high interest-only mortgage rates.
Tom Cleary, financial services director at Start Financial Services looks at the impact of the Mortgage Market Review and the legacy of self-certification lending. He says there is hope for the remortgage market, which will come when the Bank of England moves to increase the bank base rate.
Aaron Frizzel, group compliance director at Clear Mortgage Solutions considers how self-employed applicants have been affected by a downturn in remortgage activity. Frizzel says it is down to brokers and lenders to make clients aware of deals that suit them.
The obvious cause for the suppression of remortgage activity is the change to lending policy which put borrower protection at its core.
It was a case of sales trumping underwriting. It was based on a one direction philosophy if the economy stays strong: salaries should increase; the property value should increase – so where’s the risk? No need for rules let’s instead concentrate on profit whilst the sun shines.
In 2007 / 2008 the reset button was firmly pressed. Income multiples to determine maximum borrowing were ditched and affordability calculations become the fashion. Items such as pet insurance, satellite TV and clothing costs suddenly were important as monthly disposable income arrived as the new benchmark rather than the traditional gross pay measure.
Interest-only has been judged a luxury for the super-rich as apparently everyone else has the inability to make a sound investment judgement.
Fast-forward to 2014 and you have a generation of existing customers on mortgages that are much higher than the affordability calculations today allow sat on ‘interest-only’ mortgages on great rates. No wonder the remortgage market dried to a frazzle.
On top of this you could add in the changing face of employment with more self-employed applicants than ever before and the birth of zero hour contracts: potential instability that makes lenders turn shy.
House prices have throughout remained on an upward curve so equity in property has become a substantial commodity. The applicants I talk to on a daily basis have compromised on the interest-only low rates, and decided to release this capital to net a greater gain overall through investment in projects. They are backing their own judgment and strategies to make money, and are using property to fund these objectives. And, to put it in perspective, new fixed-rate mortgage finance is still at all-time low levels. The complexities in finding the right lender are, however, much greater due to the Mortgage Market Review and clients should be urged at all times to seek independent advice from a mortgage professional.
Tom Cleary is financial services manager at Start Financial Services
Why is the remortgage market still in the doldrums? The reasons are a combination of the legacy of self-certification lending and the changes in affordability since the Mortgage Market Review (MMR).
Borrowers that currently have a self-certification mortgage may have found they cannot borrow even the same amount as they currently owe, but have been quite happy to stay on their lender’s SVR, as interest rates have not increased since March 2009.
For those that have been happy to declare all of their income, they may still find that they will struggle to borrow the amount they would like, maybe to fund an extension or other home improvements, since the Bank of England imposed loan-to-income caps on lenders in October last year. We have seen an effective reduction in lending amounts of around 18% with some lenders since then.
So it is not surprising that remortgage activity is not where we would like it to be at the moment.
However, the good news is that it is very easy to predict exactly when the remortgage market will start to increase. That will be the very day that the Bank of England increases the base rate. The first increase is bound to be small, with subsequent rises certain to be measured and gradual, but that first increase will signal that rates go up, and they will only continue to rise, albeit slowly and incrementally.
This will be the day that every single mortgage broker in the country will be inundated with phone calls and e-mails from their client bank.
I would agree that MMR has had an impact on a proportion of existing borrowers. Affordability calculations are, in some cases, quite restrictive, if not a complete barrier for some. Ironically, the lower rates could, perhaps for the short term, improve household affordability.
Self-employed applicants have certainly been affected – with more sole traders and SMEs than ever, this will be felt by many. The downturn will also have left many mortgage prisoners due to loan-to-value restrictions. Historically low rates are sadly not available to all, and those who are eligible, well, perhaps the media have led them to believe the process is just too much of an effort.
There is little doubt with such attractive rates the lenders are in the market for remortgage business and brokerages across the UK have many clients on variable rates. Several key figures in the industry see the next six months as an opportunity where remortgages are concerned. If our firm’s current new business is any guide however, it seems the general public remain slightly more focused on buying than remortgaging at present.
Does the appetite to remortgage sit with the banks and brokers? For now, it would appear so. There is no doubt that fantastic rates are out there for some, it is surely up to us, the brokers, to reach out to our clients, make them aware of the low rates and, with high levels of service and sound industry knowledge, help them to benefit from these current deals.