Remortgages Surging in New Interest Rate Environment

The number of remortgages has surged by 41% over the 12 months between December 2016 and December 2017, from 28,400 to 39,943, according to conveyancing service provider LMS.

Following the increase in the base rate to 0.5% in November last year, the majority of lenders passed on the full 0.25% rise and also increased their standard variable rates (SVRs). Around 8.1m UK households have a mortgage, with almost half of these on either an SVR or tracker rate. In the current climate, borrowers’ motivation to remortgage has hit its highest level since the financial crisis.

Nick Chadbourne, the Chief Executive of LMS, says: “We are still in a settling-in period – borrowers and lenders have yet to fully acclimatise to the current situation. But rising interest rates on trackers and SVR mortgages are driving remortgage activity, with borrowers highly motivated to remortgage. In this busy climate, all the stakeholders in the mortgage industry need to do what they can to make the borrowing process as simple and straightforward for consumers as possible.”

The rise in activity in December is likely to continue in the coming months, LMS believes, as the base rate is predicted to rise again. In November 2017, the Governor of the Bank of England (BoE), Mark Carney, said that two more base rate rises were likely by the end of 2020.

Remortgages Surging in New Interest Rate Environment

While the Bank kept rates on hold this month, the Monetary Policy Committee (MPC) has stressed that it sees a need to tighten monetary policy more rapidly than it did three months ago. The markets are now pricing in the next base rate rise to occur as soon as May, and for there to be at least three rate increases over the next three years.

LMS research suggests that 82% of borrowers now expect an imminent rise.

Chadbourne adds: “The talk of further base rate increases will no doubt continue to stimulate the market over the coming weeks.”

November’s rate hike is also shaping borrower appetite, with demand for variable rate products dropping to just 2% of the remortgage market in December last year – a sharp decline from the 9% in December 2016 and a new low.

Demand for five-year fixed rate products has risen, making up 46% of recent remortgages – double the 23% market share recorded in December 2016.

Chadbourne comments: “With the base rate having risen for the first time in ten years, borrowers have started looking for greater security. Product requirements have therefore had to change, with lenders adapting to a shift in the market and the dwindling popularity of variable rate products. While variable rate products are versatile and provide a level of flexibility that might have appealed to borrowers when the base rate was falling, in the current climate of rising rates, the security offered by fixed rate products is the natural choice for many now. Borrowers have been primed to expect a higher cost of borrowing, and they are opting to secure their position and eliminate risk where possible.”

The popularity of two-year fixed rate remortgage deals also rose, up from a low of 20% in October 2017 to 23% in November and December.

In the run-up to the introduction of the 3% Stamp Duty surcharge on additional homes in April 2016, investment in the buy-to-let sector soared. Indeed, in December 2015, Connells Survey & Valuation reported that the number of buy-to-let valuations it conducted had risen by 86% compared to the previous year, as landlords raced to secure properties before the tax changes took hold.

Given that the cheapest buy-to-let mortgage rates are found on two-year fixes, landlords are now renewing these deals.

Chadbourne concludes: “At the end of 2015, buy-to-let investors were racing against the clock to make sure they didn’t fall foul of the 1^st April Stamp Duty deadline – it was critical purchasers finalised their transactions before being hit by the 3% surcharge.

“With the popularity of two-year fixed rate mortgages with landlords, that caused a spike in the market, which is now working its way through the system as these deals come to an end. Even with the new interest rate environment driving the popularity of five-year – rather than two-year – fixes, we’ve still seen an increase in their popularity recently.”