Early repayments are just an illusion

mm michaelcoogan3

Following publication of the Bank of England’s December negative net lending figure it may seem that borrowers are paying back mortgages at a cracking rate.

But this is largely an illusion created by the unusually low level of transactions in the market.

Net lending is the difference between the values of gross new lending and repayments. Both fluctuate so the net lending figure also fluctuates significantly.

This volatility is particularly noticeable at the current low levels of market activity.

As the remortgage market withered, lump sum repayments on redemption and refinancing fell, hitting the bottom in February 2010. The current monthly rate of redemptions is about 0.6% of total mortgage debt, compared to an average of more than twice that earlier in the decade.

Repayments of capital have stayed broadly stable for about a decade at around 0.2% of total mortgage debt every month. If borrowers were taking advantage of low rates to increase their repayments, these proportions would have risen.

In the past two years, lump sum repayments accounted for 0.1% of mortgage debt per month. So there is little evidence borrowers repay sooner due to low interest rates.

While this raises the question of how affordable loans will be when rates rise, we think that, as they were granted when base rates were higher, borrowers will adjust their discretionary spending to adapt to higher costs.