Despite the recent rises in the Bank of England rate, a report from independent market analyst Datamonitor reveals that remortgaging is catching up fast with loans for house purchase, and will account for almost half of the whole mortgage market by 2008.
Remortaging is forecast to increase by a further 27% in the next four years to just under £170bn. The stunning growth in remortgaging has been mainly driven by homeowners looking for a better rate of interest.
Karina Purang, financial analyst at Datamonitor and author of the report, says: “The existence of thousands of mortgage products and the increasing competitiveness of these products mean that customers are the winners.”
However, Datamonitor warns that mortgage holders should be cautious as some lenders are introducing extended redemption penalties as a customer retention measure.
By the end of 2003, the remortgaging market was worth an estimated £121bn, representing an increase of 255% on 2000 levels. Over the same period, gross advances for house purchase grew by only 54% to an estimated £122bn. Remortgaging now accounts for over 45% of total gross advances, and is set to increase to 48% by 2008. Back in 1993, the gap between remortgaging and loans for house purchases was £34bn.
A survey carried by MORI Financial Services among the GB population confirms that remortgaging is, indeed, catching up fast and becoming the norm. In the second half of 2003, almost four in 10 new mortgage holders were remortgagers. The survey also pinpoints that 28% of homeowners who have remortgaged have done so more than once within the last five years.
The average value of remortgaging loan has also shot up, from £61,000 in 2000 to £73,000 in 2002. By quarter three 2003, it had increased by a further 10%, to £80,232.
However, the growth rate of remortgaging will significantly slow down in the next four years. Albeit at a faster rate than the overall market, remortgaging is forecast to increase by 27% in the next four years, to £169.6bn in 2008.
Purang says: “Huge increases experienced in the three years cannot be sustained. If consumers believe there will be further base rate increase, take-up for short-term fixed rate mortgages will increase thus restricting remortgaging.
“This also implies that mortgage products will be more expensive. Those who have taken their mortgage when interest rates were lower will be better sticking with their own mortgage.”
Homeowners are strongly tending towards switching mortgage lenders, not necessarily as a result of financial difficulties or hardship, but because they realise how much they can save on interest rates by remortgaging. According to MFS, over 70% of the remortgagers interviewed have moved to another lender, while 44% have renegotiated the terms of their mortgage contract, with either the same lender or another lender and 35% have withdrawn equity from their property.
Home improvements and extensions is the main reason why homeowners are withdrawing equity but an increasing number of homeowners are doing so for debt consolidation purposes.
Currently, the base rate stands at 4%, but the effect of the rise is unlikely to be badly felt by consumers, as interest rates are still low. Nonetheless, in case of further increases during the course of the year, Datamonitor predicts that homeowners are likely to be more cautious in withdrawing equity to finance luxury lifestyle choices, such as expensive cars or holidays.
Lenders are aware of the high probability of their existing customers switching lender in order to benefit from these preferential rates but most of them are unwilling to offer the same rate to all borrowers, as such a move will considerably decrease their profit margin.
Customers are, without doubt, the winners of the prevailing competition that has been generated by the upsurge of remortgaging. They are being given the opportunity to make significant savings on their mortgage repayments and often at no or little extra costs.
Datamonitor advise mortgage holders keep on shopping around and keep themselves updated with the changes in the mortgage market.