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Time to Talk Remortgaging

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Our Mortgages Managing Director, Richard Rowntree, reflects on the latest mortgage industry data and reveals why now is the time for brokers to be talking to their clients about remortgaging.

The buy-to-let market was buoyant during 2021 as the Stamp Duty holiday and record levels of tenant demand kept underwriting teams busy throughout the year.

High levels of buying activity during 2021 led to buy-to-let house purchase accounting for its highest proportion of lending against remortgages for a number of years, but that trend could quickly reverse in 2022.

This year marks five years since the Bank of England's Prudential Regulation Authority (PRA) introduced new underwriting rules that led to the growth in five-year fixed rate mortgages in the buy-to-let market.

Industry data shows between December 2016 and January 2017, the number of five-year fixed rate mortgages written increased from 3,008 to 4,167. Over the next year to January 2018 this number climbed to 10,717 and has rarely dipped below the 10,000 mark since.

Looking at the value of five-year fixed rate deals, £12.5 billion was written during 2017, more than double the £5.9 billion completed in 2016.

As those five-year fixed rate mortgages mature, competition will be strong amongst lenders to both retain existing customers and attract new business. Brokers should be talking to their clients early about what they intend to do and the opportunities that exist for their business.

But what caused this and what does it mean for the industry?

Figures published by the Department for Levelling Up, Housing and Communities show that since the start of the new millennium, the private rented sector had seen significant growth while the number of owner occupiers plateaued before starting to decline in the wake of the global financial crisis (GFC).

In a bid to reverse this trend, midway through the 2010s saw the coalition Government abandon tenure-neutral political policy with the introduction of fiscal and regulatory changes that made investment in the private rented sector less attractive while mitigating the risk of emerging weaker credit standards.

To meet the strong demand for buy-to-let mortgages some lenders relaxed criteria and didn't take into account a landlords' wider property and business interests. Learning lessons from the GFC, the PRA intervened to avoid investors becoming too highly geared.

In January 2017 new standards were introduced that focused on two different aspects of underwriting. When assessing a borrower's ability to afford the mortgage for which they had applied, underwriters were required to undertake a minimum affordability calculation. This took into account the increase in landlord costs as a result of recently introduced tax changes, together with a minimum stressed interest rate.

To reflect the benefits to the customer of the rate being static for an extended period, lenders generally applied a lower stressed rate for mortgages fixed over five or more years. This, combined with the appeal of fixing for longer amidst increasing rates, resulted in an increase in borrowing over five-year terms.

With rates still relatively low at present but starting to rise, it is quite likely that we'll again see borrowers keen to remortgage and secure a good rate at the earliest opportunity.

To support our customers with this we have refreshed our switch and further advance products, making them more competitive.

We know that around 40% of borrowers withdraw equity when remortgaging and this takes more time to process when compared to a straightforward switch so we have also updated our website and intermediary portal so the process is as smooth and seamless as possible.

I'm sure other lenders have their own plans in place, the industry looking at resources in key areas in order to maintain service levels, but the sooner we can be talking to customers, the smoother the process will be.

Lenders are, of course, well-honed with dealing with remortgage business and last year may have been an anomaly. With the pandemic unlocking a generation of homemovers, landlords took advantage of record low interest rates to modify their portfolios, tipping the balance more towards house purchase.

This manifested in a variety of ways in both the owner occupier and privately rented markets. We have seen examples of equity rich homeowners who have opted for the flexibility of rented property before committing to buying in a new location. With hybrid working models now the norm for many, some renters have sought properties with extra space for home working, some have upped sticks in search of areas benefitting from more green space or a slower pace of life, while others have done the opposite and taken advantage of the initial shift from city centres to secure an affordable apartment in the thick of the action.

Looking at industry figures, we see a flurry of activity in June and September as buyers rushed to complete purchases before the threshold at which tax was payable was lowered to £250,000 in July and £125,000 in October.

Following these spikes, purchase levels did drop off somewhat - the latest data shows that the £2.8bn written for buy-to-let purchases in June fell to £800m in July and £1.1bn in August, before climbing back up to £2.1bn in September - but instead of leaving lenders twiddling their thumbs, remortgage business levels remained stable and swapped places with purchases as the purpose for the majority of mortgages written.

This indicates that the remortgage market is already a strong driver of business and with evidence to suggest that the coming months will see many more mortgages mature, now is the time for brokers to be exploring remortgaging options with their clients.

This article was first published in Business MoneyFacts 

Richard Rowntree
Managing Director for Mortgages