Remortgages reborn

Easter and spring are times of the year traditionally linked with fresh beginnings – out with the old and in with the new. But this year people won&#39t just be decluttering their houses – they will also be dusting down their finances and looking around for better mortgage deals.

Remortgaging remains a buoyant market with figures from the Council of Mortgage Lenders showing that remortgaging cases accounted for just over 40% of total lending in February.

And brokers unanimously say that remortgaging is currently making up the bulk of their business. Mike Fitzgerald, sales director at Brentwood-based Brentchase Financial Services, calculates that 85% of his business derives from clients who want to remortgage their properties.

“We haven&#39t seen any let-up in this market and expect it to keep growing as other sectors such as the first-time buyer market continue to take a back seat,” he says.

Rob Clifford, managing director of mortgageforce, says any one of his branches could be doing 100% remortgaging business. “It is an extremely healthy market at the moment,” he adds. “Over 70% of our cases are remortgaging. While some branches may concentrate on new-builds, one particular branch could be doing only remortgaging.”

With research from Abbey last month suggesting that one in 10 people intend to remortgage their homes over the next 12 months to gain ready money, it is predicted the sector will continue to grow at a steady pace. However, those rosy-sounding CML remortgaging figures for February actually represent a decrease from January. Remortgaging was £1bn lower in February than January and, at £8.3bn, was at its lowest level for a year, says the CML. So what is the true picture?

Brokers are certainly not concerned about the fall and see it as a natural dip in the market. Ray Boulger, senior technical manager at Charcol, says a decrease is expected in February. “There are always lower levels of business in February than January. It is not a sign the market will fall,” he says.

And Fitzgerald believes the figures reflect the fact that 2003 was a record year of lending and those levels could not be sustained.

However, brokers are split over the reasons why clients are rethinking their mortgages at the moment. Fitzgerald says the majority of his clients are remortgaging to buy properties abroad rather than for traditional reasons such as debt consolidation.

“Many people want to buy holiday homes, mostly in France, and are raising the capital by remortgaging,” he says. “We haven&#39t found that a lot of people are doing it to consolidate debt as in the late 1980s and early 1990s when lenders such as Halifax had a base rate of 15.4% and people had to remortgage because of the horrendous financial difficulties they were in.”

But Fitzgerald admits that as interest rates rise, debt consolidation will be a growing reason for people to remortgage. “A common misconception is that people remortgage their properties because they have large mortgages but this is not always the case. It is due to other factors such as wanting to buy a car, home improvements or to manage other external finances,” he says. “But as the amount of unsecured debt rises, people will remortgage to manage their debts.

“I recently had a client who had a £200,000 mortgage and £180,000 in unsecured debt on 10 credit cards. As brokers we must advise these clients to see a debt counsellor, which this client did. But he still insisted he wanted to remortgage the house. All that debt will be on his property. Unsecured debt is drowning people.”

But Kevin Morgan, managing director of Hertfordshire-based EZI UK, says debt consolidation is already his clients&#39 primary motivation for remortgaging. “We have a campaign at our firm whereby we encourage clients to pay off debts now while rates are low,” he says.

“The proportion of debt to equity has come down so if house prices fall in the future people will just be left with the debt. Clients should pay off debt now but only if they have a strategy in place by which they can outline the period over which they will repay it. Some clients go in with their eyes shut which can be dangerous, especially if they on an interest-only deal.”

Mark Osland, director of Croydon-based Fidelius, says most people are remortgaging simply to obtain better rates and has found that remortgaging in the buy-to-let and commercial sectors is steadily on the increase.

Despite this, London-based brokerage Savills Private Finance says investors should be reviewing their property portfolios more regularly to ensure they are not paying over the odds for mortgage products. It says many property investors are on pay rates that are much steeper than the best deals currently on offer and should be remortgaging now to lower their monthly mortgage payments.

Savills says if clients remortgage from a typical SVR of 5.79% and move to a competitive rate of 0.99% over base rate with a current pay rate of 4.99%, monthly mortgage payments for a £150,000 mortgage on an interest-only basis over 25 years would be £624 rather than £724 per month. Savings per year on a portfolio of four properties would be £4,800.

Simon Jones, director at Savills, says many property investors come off the interest rate they first signed up to after the offer period ends and do not think about remortgaging. “If you do not have any redemption penalties the cost of remortgaging can be relatively low,” he says. “People think that remortgaging is a costly and time consuming process but it is worth setting time aside to review current mortgage arrangements as there could be huge savings to be made.

“For those looking to purchase additional investment properties, remortgaging to a better product and releasing some equity from existing properties could fund the deposit on the new property.”

Products that clients are favouring when remortgaging include short-term fixes which brokers say give clients the stability they are often seeking at the beginning of a mortgage. “A lot of people want two or three-year fixes while a small number are going for five-year fixed products,” says John Stewart, director of Basildon-based PMI.

But Morgan says an increasing number of consumers are opting for offset deals. “These products work well for remortgaging cases as they can provide clients with the opportunity to fund their own spending in the future,” he says. “Lenders such as Standard Life Bank also have good remortgaging deals whereby the rates are higher but in the longer-term, the client will save money.”

Fitzgerald adds that remortgaging is made more appealing due to the fee-free benefits that often come with these products. “We&#39re currently handling a remortgage deal on a £250,000 property,” he says. “There are a possible 32 products to choose from, all with no fees attached including free legals, no valuation fees, no booking fees and no redemption penalties at any time. Even smaller building societies such as Melton Mowbray charge no fees on tracker deals while Cheltenham & Gloucester provides fee-free products at good rates.”

Osland agrees. “If you look at remortgaging products and rates, it costs little or nothing to arrange. Lenders are waking up to the fact that if a client has to fork out £1,500 in costs then it&#39s probably not worth them switching mortgages,” he says.

However, Clifford warns that some lenders manipulate the marketing concept of fee-free. Clients will often still be required to put their hands in their pockets and pay costs during the remortgaging application process. “When lenders say &#39fee-free&#39 this is not always strictly the case. You&#39ll find there are completion fees and valuation fees which are refunded on completion, while the free legals will only apply up to a certain amount. I wouldn&#39t classify this as fee-free.”

Remortgaging has also been linked to churning as consumers continue to chase rates. Brokers feel that government intervention will be the only way to cut levels of remortgaging in the future. Morgan says the structure of the remortgaging market would have to be altered to stop clients switching deals regularly. “There needs to be a sea-change in the way the mortgage market is structured if we are to see the amount of remortgage business reduce.” he says.

“Chancellor Gordon Brown is looking to do this by introducing longer-term fixed rates as he sees current house price activity and the popularity of short-term deals as having an adverse effect on inflation and debt.”

Although the demand for long-term fixed rates is still minimal, lenders are slowly making a play in this sector. Abbey is the latest to do so by launching a 15-year fixed rate at 5.74%. This is the second initiative Abbey has undertaken in recent months to support these types of products. In December 2003 the company introduced a &#39guaranteed deal for life&#39 mortgage whereby in return for an upfront fee (which has been reduced from £1,000 to £500). Customers pay 0.50% above Bank base rate for the life of the mortgage and there are no penalties for early repayment.

Other lenders, including Northern Rock and Southern Pacific Mortgage Limited, have recently either reduced rates on fixed deals or extended terms.

So, are lenders now making a bigger effort to retain their customers? John Stewart believes if lenders were made to follow all the major recommendations in the Miles report there would be no need for people to remortgage at the pace they are currently doing. “If all lenders made their product ranges available to both new and existing customers we could see a substantial fall in the number of people remortgaging,” says Stewart. “But then rates would be pushed up as existing borrowers would no longer be subsidising new borrowers.”

But Boulger says that although lenders such as Northern Rock have concentrated on customer retention the majority have not changed their policies since Miles was published, while Clifford believes remortgaging can only be reduced if lenders change their product design “Nothing dramatic will happen in the next five years to stop people shopping around,” says Clifford. “Consumer groups say borrowers have every right to seek the best deals and switch products – and it is the broker&#39s job to remind clients when the penalty period of their loan comes to an end and advise on any better products that are available.

“The only real way to cool the remortgaging market would be to change the product designs or for the government to impose rules on lenders to restrict products. Most brokers would be against this.”

Boulger adds that while he expects regulation to have no adverse effect on remortgaging activity, the sector&#39s sustainability will depend on the industry&#39s capacity to deal with the regulatory environment. “It is logical to expect a significant decline in the market across the board come regulation, ” he says. “But this will be born of a change in the industry&#39s ability to handle demand rather than a change in consumer demand,” he adds.

Overall, the outlook for remortgaging remains positive as the threat of further hikes to interest rates pushes consumers to seek better deals.

Peter Mounty, head of communications and quality at Cheltenham & Gloucester, believes the slow start seen at the beginning of this year will quickly turn round in the Easter and summer periods. “The remortgage market may be looking sluggish in the first quarter of the year but Easter is sure to bring an increasing enthusiasm for home improvements so remortgaging levels will be boosted,” he says.

“We may not see the record levels of 2003 in this year but in a competitive mortgage market, remortgaging is well placed to continue to play an important part.”