As millions of borrowers languish on an SVR despite rates being at all-time lows, what more can the industry do to persuade them to remortgage and avoid an unnecessary ‘inertia tax’?
The prolonged recovery by the remortgage market must be one of the lengthiest in the history of financial services.
Long after the purchase market started to pick up, remortgage lending remains woefully low by historical standards.
A decade ago, typically more than a million borrowers a year were switching lender to obtain a better deal. Last year, in contrast, the figure was only just over 384,000, according to the Council of Mortgage Lenders.
Yet UK mortgage rates are at an all-time low. So why are so few borrowers choosing to change lender to obtain a better deal?
In fact, over the past 15 months there has been an increase in remortgages: in March this year, 35,500 existing borrowers transferred to a new lender, compared to just 28,700 in March 2016 – a 23.7 per cent increase. However, a decade ago, in March 2007, the figure was nearly three times higher than this year’s, at 97,600.
Further back still, in March 2003, the number of remortgage completions was even greater, at 124,400, and astonishingly it reached nearly 138,000 in October that year.
Middleton Finance managing director Daniel Bailey describes a typical scenario encountered by brokers. He says: “I recently advised on a remortgage for a couple who were both self-employed and had not reviewed their mortgage since 2007.
“Their explanation was that they had been too busy building their business and had never got around to looking at a remortgage.”
Although brokers and the financial media often preach about the benefits of shopping around for the best deal, this seems to have little effect on consumer behaviour.
According to data firm CACI, about 3 million UK borrowers are resting idly on their lender’s standard variable rate, with loans totalling around £246bn.
A further £122.9bn-worth of mortgages will revert to SVR in the second half of this year, Virgin Money’s analysis of the CACI data finds.
This ‘inertia tax’, as some professionals have called it, is earning around £10bn a year for banks and building societies, according to estimates by online mortgage broker Trussle. Despite interest rates having fallen to historic lows, £816bn-worth of mortgages were more than 2 percentage points above base rate at the end of last year. That accounts for nearly two-thirds of the £1.3tn of outstanding mortgage debt in the UK, the CML says.
Do the maths
At present, the average SVR is 4.59 per cent. For a borrower with a £150,000 mortgage, this means they would pay £841 a month. However, if the same borrower were to switch to Yorkshire Building Society’s 0.99 per cent two-year fixed-rate deal, they would pay only £565 a month, saving themselves the considerable sum of £3,312 a year.
Of course, not all borrowers would be eligible for Yorkshire’s highly attractive rate. Nevertheless, even the prospect of saving thousands of pounds a year does not appear to be enough motivation to persuade thousands of borrowers to remortgage.
Brokers think a major reason for this is customer apathy. Perception Finance managing director David Sheppard says: “Unlike some financial products – especially credit cards – there is more inertia with borrowers when it comes to their mortgage.”
He adds: “A lot of people don’t actually know what rate of interest they are paying. They may feel they are already on a good rate, although they could be on an even better deal without knowing it.”
For those employed in the mortgage market, where home loans are the focus, it can be easy to over-estimate how frequently borrowers think about their interest rate, as London Money director Martin Stewart points out.
He says: “The industry forgets that the consumer doesn’t obsess 24/7 about mortgages, like we do.
“To put that into perspective, I haven’t checked the oil level in my car for months, no doubt to the horror of my mechanic.”
Of course, in the wake of the Mortgage Market Review that was implemented three years ago, thousands of borrowers became potentially unable to remortgage because the tougher rules meant they no longer met lenders’ criteria.
In such cases, however, lenders have discretion to ignore the affordability rules as long as the customer does not wish to borrow more or their affordability has not changed materially.
But lenders have faced fierce criticism for failing to waive the rules for borrowers who seek to switch from a rival bank or building society. As a result, thousands of mortgage customers have become trapped on expensive deals.
Other borrowers wrongly believe they are ineligible for the cheap deals that have swamped the market in the past year, according to brokers.
Coreco director Andrew Montlake says: “Unfortunately, too many borrowers have become apathetic about moving their mortgage, with many still believing it is hard to do when in fact there is much more choice available.
“Many have automatically believed that new affordability measures will mean they cannot move, or it will be a hassle to do so.”
Stewart adds: “Many people think they are mortgage prisoners and so are possibly hiding their head in the sand, not wanting to rock the boat. Others are on low SVRs with lenders, which may well be higher than remortgage rates but not enough to get the borrower motivated to switch.
“The broker community can only do so much. With 10,000 of us, it’s not a big enough army to bridge that advice gap.”
Remortgage lending accounted for just 29 per cent of all lending in March, according to CML data. By historical standards this is low: the figure was 36 per cent in 2007 and 45 per cent in 2003.
Product transfers, meanwhile, are booming. This area of the market has been privately described as a ‘black hole’ by leading members of the industry because it lacks official data.
Respected pundits believe product transfers account for £80bn–£100bn a year. If this estimate is correct, the sector comprised between 32.5 per cent and 40.6 per cent of the total of £246bn lent last year to borrowers on SVRs.
In contrast, it has been six years since the remortgage sector accounted for more than 32.5 per cent of the market, according to CML figures.
The Association of Mortgage Intermediaries has been highly critical of lenders for targeting product transfer business since the MMR, arguing that consumers may suffer detriment by not taking advice. However, over the past few months a raft of lenders have begun rewarding brokers for retention cases, meaning more borrowers will receive advice.
Stewart says: “I don’t think we are on the cusp of a remortgage boom but I think we are on the cusp of a product transfer boom.”
John Charcol mortgage technical director Ray Boulger says: “The large downturn in remortgage approvals coincides with the increase in lenders offering product transfers through brokers. I suspect this is part of the reason for the large decline in remortgage approvals.
“It seems logical to expect the ratio between product transfers and remortgages to continue moving in favour of product transfers as more lenders decide to work with brokers on them.”
Most lenders, however, are highly secretive about their retention ranges, while others claim their products for existing customers are bespoke, which is peculiar given that their ranges for new clients are anything but.
But what is clear is that not all lenders reward their existing customers for loyalty, so the remortgage market still has an important role to play in helping borrowers to find the best deal.
What, then, can brokers do to improve the situation? And will the remortgage market ever fully recover?
Bailey says: “As brokers, we need to be asking our existing clients if they have any family, friends or colleagues who have not reviewed their mortgage for some time and could potentially be saving money.
“This could be the year of the remortgage but, as an industry, we need to do more to educate and highlight to potential new clients that they may have other options available to them.”
Boulger is less positive about the prospects of the remortgage market, pointing to the Bank of England’s approval figures that show a dip in the number of loans given the green light in April.
However, Montlake says: “I think we could see remortgage lending tick up.
“If you look at the way things are moving, lenders are really targeting remortgage business and are becoming much more adept at offering enticing packages, especially as purchase transactions have slackened off.”
Help your clients to benefit before it’s too late
London and Country associate director David Hollingworth
In this era of record-low mortgage rates, it would be easy to assume that the bulk of homeowners are shopping around on a regular basis to see if they can better their current deal.
However, when we conducted research into consumer behaviour recently, we were surprised to find that 36 per cent of those surveyed were paying their lender’s standard variable rate. When you apply that to the overall market, it means that millions of homeowners could be paying over the odds on their mortgage.
Of course, there is a wide variety of reasons for borrowers to stick with a high SVR when bargain-basement mortgage rates are on offer all around. Some will be very close to the natural end of their term with only a very small mortgage.
Others may find their options more limited elsewhere by changes to their personal circumstances or in criteria. For example, a borrower who has switched from employed to self-employed may find that many are not prepared to lend.
Others may have experienced a reduction in income, growth in committed expenditure or both if they have started a family, for instance. Interest-only borrowers may also feel switching options are limited without requiring them to alter their repayment method.
None of these situations are necessarily insurmountable problems and seeking advice will be the best way to chart the right route. Brokers are doing a good job of helping consumers understand that not all lenders are the same and that finding a bank or building society with the right criteria is as important as getting the right rate.
Nonetheless, there remains a good deal of inertia and apathy among homeowners, who really should be taking advantage of the rates on offer. Competition in the market is probably as strong as it’s been since the credit crisis and, just as you think rates can’t drop any more, another lender steps forward to confound that presumption in a bid to attract its slice of the remortgage pie.
Even when the baseline lows are not in a state of flux, lenders continue to tweak their range to gain a competitive advantage, whether through a lower rate, additional incentives such as cashback or both.
Although new lows do pique borrower interest, the uplift can be surprisingly short-lived and the same or greater reaction can be seen when rising rates threaten.
That perhaps should not be surprising considering there’s now an entire generation of homeowners who have never known base rate to be higher than 0.5 per cent.
Complacency sets in when there may always be a cheaper rate around the corner, despite the fact that they may be paying a radically higher interest rate.
It’s impossible to rule out that rates could be nibbled a little lower still, but paying SVR for another few months is likely to eradicate any saving when we are already at such a low.
The bigger reaction will come when the talk of an increase in base rate gains momentum again. By then, however, the chance to lock in at the low point, to overpay and to prepare for higher rates will have passed by.
In the meantime, let’s hope more borrowers grasp the opportunity in front of them.