- Remortgage market has frozen as 4.8 million ‘silent prisoners’ and ‘sitting pretty borrowers’ have been stuck in their current deal or lacked an incentive to switch from pre-2008 low rate tracker deals
- Although 2 million ‘savvy switchers’ have remortgaged over the past 5 years, another 4.4 million ‘stay putters’ have not switched lender – even though they could already benefit financially
- Rising house prices, higher interest rates, improving job prospects and more competition between lenders will all entice borrowers back to the market
- Remortgage lending forecast to rise 45% from £55 billion in 2013 to £80 billion in 2016 as a result of this remortgage resurgance.
A surge of interest from borrowers who have been dormant since the financial crisis will spur a recovery in remortgaging as improving economic conditions tempt more homeowners to switch deals, according to a new in-depth report from Mortgage Advice Bureau.
The report identifies three dormant borrower groups that explain the recent lull in remortgage transactions, which plummeted from 1.2 million in 2007 to a low of 350,000 in 2010 and recovered just 14% to 399,000 by 2013:
- Three million ‘silent prisoners’ (27% of mortgage holders) have been stuck with their current mortgage, unable to move home or shop around for a better deal. Some have been trapped by negative or insufficient equity while others have faced worsened financial circumstances such as unemployment or found tightened lending conditions – including the Mortgage Market Review – prevent them accessing mortgage finance.
- ‘Sitting pretty borrowers’ are currently paying a rate that is better than what is available in today’s market. Most are on lifetime Bank Rate or Libor tracker deals taken out before the financial crisis of 2008-9 and currently pay less than 2.5%. We estimate that sitting pretty borrowers are saving £5.4 billion a year in interest relative to borrowers on standard variable rate (SVR). An estimated 2.8 million borrowers (25%) are sitting pretty, including up to 1 million who are also ‘silent prisoners’ and no longer qualify for a mortgage.
A combined total of 4.8 million borrowers (43%) in these two groups have therefore been locked out of the market or had no incentive to switch, resulting in the severe fall of remortgage activity in 2008-9 and its slow recovery since.
- The third dormant group comprises 4.4 million ‘stay putters’ (39%) who could already benefit financially from remortgaging, but have not bothered to do so. This easily outnumbers the 2 million ‘savvy switchers’ (18%) who have taken the initiative and improved their deal by remortgaging over the past 5 years.
Silent prisoners to be paroled as rising rates spur remortgaging
Recovering house prices and improved job prospects are now set to reduce the number of silent prisoners, as well as eased lending criteria as the economic recovery becomes more entrenched and MMR settles in. Fears about rising interest rates will encourage more stay putters to switch to fixed rate deals to protect themselves, and even sitting pretty borrowers could find that new discounted deals will look attractive under a higher Bank Rate.
The three motives to remortgage – ‘the 3 Rs’ – will drive the recovery:
- Releasing cash through remortgaging has always been the cheapest way to borrow. But from 2006 to June 2014, the rate gap widened as the average Standard Variable Rate (SVR) mortgage fell from 7.0% to 4.4% while average overdraft rates rose from 17.2% to 19.7%.
Falling house prices wiped out £335 billion of housing equity in the financial crisis, but this was regained by the end of 2013 and households now have a record average of £132,000 of housing equity. Each additional 1% rise in house prices giving mortgaged homeowners another £23 billion of housing equity which will continue to free more silent prisoners from negative or insufficient equity.
- Rate cutting, allowing cheaper repayments, is also re-emerging as a motive to remortgage. Lenders are stepping up discounting as the appetite to lend recovers. There has never been such a huge variation between lenders’ SVRs, with differences of more than 3% in some cases, so fewer customers are going to stick paying a high SVR.
- Rate capping – or locking into a fixed-rate deal – is now firmly back on homeowners’ agenda with the Bank Rate set to increase after remaining stable for the past five years at 0.5%. There are already signs of consumers rushing to lock into fixed rates, with 89% of those who remortgaged in July opting for a fixed rate product.
Brian Murphy, head of lending at Mortgage Advice Bureau, commented:
“After languishing behind the purchase market in terms of recovery, the stage is set for the remortgage market to experience a significant pickup in activity. Although lending criteria have tightened under the Mortgage Market Review, the available options have greatly improved since the recession and will continue to do so.”
“Recovering house prices mean many homeowners will finally be in a position to re-enter the market for the first time in years with the equity needed to access new loans. Many more borrowers will want to position themselves on the most favourable deals before losing the advantages they have enjoyed in an era of exceptionally low interest rates.”
“After years in the doldrums, the market looks poised for a resurgence of interest from consumers who will very soon find a host of reasons to reassess their existing mortgage.”
The forecast for remortgaging – sunny prospects ahead
This analysis confirms that recent signs of renewed activity in the remortgage market (there was a 21% upswing in remortgage applications in July) are indicative of strong long-term prospects for growth.
Total remortgage lending reached £55 billion in 2013, and Mortgage Advice Bureau forecasts that this will rise to £58 billion in 2014 and £80 billion by 2016.
Since 2009 there has also been a remarkable turnaround in buy-to-let (BTL) remortgaging, with BTL accounting for a record 19% of all remortgaging in 2013. A strong rental market indicates that this segment has particularly strong long-term potential, with forecast growth of 79% from 2013 to 2016.
A more substantial recovery should not be ruled out: this forecast is conservative, as the total 530,000 remortgage transactions forecasted for 2016 still represents less than half of the annual total of any year between 2002 and 2007.
Peter Brodnicki, chief executive of Mortgage Advice Bureau, commented:
“The market has changed significantly since many dormant borrowers first took out a loan or last switched their mortgage. The emphasis on advised sales under MMR means anyone returning to the market after a long absence will find brokers are becoming increasingly central to picking the best product to meet their needs.”
“Moves are already underway by some lenders to limit the availability of certain products through their branch networks or pay intermediaries for product switching. The market is evolving fast, and advice from a broker who knows your circumstances and can offer a whole-of-market service will be a godsend to anyone seeking to better their existing deal.”