Seated from left: John Malone, group chairman, PMS; Carlos Thibaut, managing director, Lifetime; Sue Anderson, head of member and external relations, Council of Mortgage Lenders; David Finlay, managing director intermediary, Barclays. Standing from left: Jonathan Cornell, head of communications, First Action Finance; Andrew Montlake, communications director, Coreco Group; Brian Murphy, head of lending, Mortgage Advice Bureau; Jon Round, financial services director, LSL Property Services; Ray Boulger, senior technical manager, John Charcol
With interest rates held at a record low of 0.5% for over two years, the remortgage market is in the doldrums. Council of Mortgage Lenders figures show it hit a 13-year low last year and this year it crashed by a massive 28% by number and 27% by value in April compared with March.
As house prices continue to fall and underwriting criteria remain as strict as ever there is a danger of more and more borrowers becoming mortgage prisoners. Can anything be done to boost remortgaging or must the industry wait for a rate rise? What can lenders do to stop borrowers being trapped on existing deals?
Mortgage Strategy brought together key players from trade bodies, lenders and brokers to find a solution.
HOW IS THE REMORTGAGE MARKET FARING AT THE MOMENT?
Sue Anderson: The CML’s remortgage figures and Bank of England’s statistics do not show a positive picture. We don’t expect there to be any increase in the foreseeable future either. We have not changed our gross lending forecast for the next two years as a result of our latest remortgage figures, but the £150bn gross lending we estimate for 2012 is at the higher end of our predictions. The reason for that is simply because interest rates are staying lower for longer than we anticipated and that will put a downward pressure on the remortgage market.
Ray Boulger: I was surprised that the CML’s gross mortgage lending estimates were as high as £140bn for 2011. When it made the announcement it was already well known that interest rates were going to remain low for a long time.
Anderson: It’s a balance of probabilities that our figures go through. No-one wants to fulfil the CML’s legacy of always being more gloomy than reality so perhaps we were a little generous with our estimates.
John Malone: One positive is that in the next couple of months there is around £16bn worth of remortgaging coming up for review from five and seven-year deals expiring.
David Finlay: There is an exceptional number of fixed rate products over two, three, five and seven years coming up for review. We don’t know how many are still in place but we are talking about billions worth of deals.
Anderson: The issue then is what they revert to rather than looking at what they can get in the marketplace.
IS THERE DEMAND FOR REMORTGAGING?
Jon Round: Purchases are reasonably strong which is expected at this time of year, while remortgages are flat. Lenders have sharpened their pricing and there is more innovation but everyone still seems to be fishing in the same pool. Lenders are looking for low LTVs and are targeting a particular set of customers. They say customers should want to remortgage but there are a lot of borrowers who have already done so and are happy to sit tight.
There is apathy from those with small loans who don’t save enough to make the hassle and cost of remortgaging worthwhile. With fees around the £1,000 mark it doesn’t make it worth it for £60,000 or £70,000 mortgages.
Finlay: Our research shows that almost one in three mortgage customers on an SVR would look for new deals if their monthly payments were set to rise by as little as £50. But only one in five would look for a new deal if interest rates were to move by 1%. I think people have got the base rate in their mind and if it only rises slightly they won’t bother to change deals. But when they realise how a rise will affect them in cash terms they are more inclined to look for deals. One thing we’ve got to do is to stop talking about interest rates and start talking about monthly payments, then customers will act.
Carlos Thibaut: There is a mismatch between the demand for remortgage deals and lenders’ affordability criteria and we find it tough to arrange deals. We have enormous pent-up demand for remortgages. For a change in volume there needs to be a change in underwriting criteria. While our remortgage business has increased slightly I don’t see it rising much over the next year. The approach to interest-only clients is not open enough and they make up around 25% of our client base.
We have some cases where clients have no credit score issues and their monthly outgoings would be reduced if they moved to another deal as they consolidated some debt, but they are rejected. It is even more ridiculous when clients with an existing lender can’t switch to other deals even though their likelihood of making repayments is enhanced as a result of their overall expenditure going down.
Anderson: Capital is the main reason for lenders doing the business they are. Our research shows that on a high LTV loan lenders need to hold six to eight times more capital than on a low LTV deal. That’s going to drive them to price up products and strip out demand.
Boulger: The point on interest-only is a good one because about a third of borrowers are mortgage prisoners. The figure is significantly higher now because of the large number of interest-only clients who will not be touched by some lenders. Frankly, Woolwich is one of the worst. We’ve had clients who wanted to port their interest-only mortgage not even increase it or raise the LTV and they have been refused because they don’t meet the affordability calculation.
Even borrowers with less than 75% LTV and a robust repayment plan are being refused because they don’t meet affordability criteria. I know lenders are under pressure from the Financial Services Authority and it is a key driving force but it’s nonsense for lenders to accept ISAs or endowments as repayment plans but not stock market-based investments. Anyone who wants to make overpayments will not be accepted either. It’s gone too far the other way.
Finlay: With interest-only repayment vehicles, say investment plans, we only really know that it is in place on the first day. There is nothing to stop individuals cashing in a day later. I think it needs a review from trade bodies, the Treasury, the regulator and lenders to come to a sensible solution.
Boulger: Some lenders say their default records on interest-only and repayment mortgages are similar so there is no extra risk. If lenders were to apply the same terms to the government that it applies to existing borrowers the government wouldn’t be able to borrow any more money as it is constantly refinancing its debts.
Anderson: The FSA is a key driver on interest-only because lenders are trying to guess the rules it will bring in and how it might retrospectively regard the business they are doing now. It is a big dilemma for lenders and creates a more cautious market than conditions would imply.
WHAT WILL IT TAKE TO GET THE REMORTGAGE MARKET MOVING?
Andrew Montlake: Some good rates have been launched recently which will help kickstart it. Abbey for Intermediaries has released some excellent two-year deals with a 1.99% tracker and 2.89% fix. These will make home owners think about moving their mortgage. They were only available for seven days but it got things moving.
Finlay: Lenders are wondering what the size of the remortgage market is going to be and all want a share of it. If we’re not getting the share we want or have more capital than expected then we will adjust our prices accordingly to bring in new business. There may be a point at the half-year stage when a number of lenders want a little more business in the pipeline and become more competitive.
Round: The number of remortgages has increased since the turn of the year. The CML’s remortgage figures for April are based on completions and therefore January and February applications.
Finlay: Most lenders will have planned for poor April results knowing there were not many working days. They will have built it into their seasonality forecasts.
Thibaut: Our experience is that May activity has returned to pre-April levels in purchases and remortgages. We’ve written about 20% more business in May than in April and did about 20% less in April than in March.
DOES THE FSA ACCEPT INDUSTRY CONCERNS OVER INTEREST-ONLY CHANGES?
Anderson: The FSA has been emphatic that it doesn’t want to kill interest-only and has emphasised how it suits certain borrowers. The problem is that until it is translated through to actual rules lenders can’t tell how easy or difficult it is to make them work in their business processes. Nor can lenders tell how this period of limbo will be viewed in retrospect by the FSA so anyone who deals with lenders needs to be aware of that.
Boulger: The final Mortgage Market Review paper is due in the autumn and the FSA is going to consult again which means we will not get the final set of rules, particularly considering the European Union mortgage directive, until well into next year. So we will have a long period where lenders are going to be worried about retrospection. Is there any way the FSA can be persuaded not to adopt retrospective policies?
Anderson: I think it would argue that it doesn’t adopt retrospective policies so it’s a question of how much trust and confidence those in the industry have about that.
Malone: No lender is going to take that risk now.
Round: It depends how far you go because there have been chunky margin hits over the last few weeks. Swap rates have gone up and product repricing has seen some impact. The number crunchers will have had discussions about moving up the risk curve I imagine.
Finlay: I think we have moved up the risk curve by offering 85% LTV and that will continue. There is also the opportunity for new entrants to come into the market and take some risk.
Anderson: It’s interesting because much of the political noise is around the first-time buyer market. It is difficult to explain the importance of remortgaging to policy makers when most of their focus is on people who are not on the property ladder.
Round: The irony is that lenders need more remortgaging to produce a balanced book. They need low LTV remortgages to demonstrate to the regulator that their book is balanced for new lending.
Malone: Some lenders think borrowers won’t remortgage because many are going to receive thousands in mis-sold payment protection insurance compensation so they won’t need to borrow any more.
Montlake: There are lots of mortgage prisoners and the low activity is not solely down to the base rate but to borrowers being incapable of moving deals because of strict criteria.
Malone: Why do most people remortgage? They’re not just trying to raise capital most are overpaying and reducing their debt.
Anderson: Actually, there is not much evidence that borrowers are overpaying particularly.
Montlake: The main prisoners are interest-only borrowers, those with problems getting the right LTV on a loan, individuals who have changed the way they work since their last mortgage.
Boulger: One of the reasons people used to remortgage pre-credit crunch was to take equity out of their property. That is more difficult now because of more restrictions.
Malone: Low LTVs and the drop in property values make it much harder to move deals.
HOW IMPORTANT ARE FLEXIBLE MORTGAGES SUCH AS OFFSET?
Finlay: We have seen steady growth in offset year-on-year.
Round: Borrowers can remortgage to a better deal and not just a cheaper one. If they are paying off some of their mortgage there is no guarantee they will get any of it back again. Being able to control access to their savings while reducing the size of the mortgage in this sort of credit environment is a powerful message in this market.
Boulger: Lots of offset clients want an interest-only deal so those restrictions will have an impact there too.
Montlake: When selling flexibility it makes no sense to recommend a capital repayment plan that will restrict how flexible clients can be.
WHAT INNOVATION WOULD YOU LIKE TO SEE IN REMORTGAGING?
Anderson: We have seen Lloyds Banking Group’s Second Stepper deal and I wonder whether lenders will start to innovate to help people who want to change their deals but don’t qualify at the moment.
Malone: In 1993/94 we had let-to-buy products from Mortgage Express and Skipton Building Society that allowed borrowers to let their property as a step towards buying it. These products serviced the so-called second steppers or first time sellers as estate agents call them. To give first-time buyers houses to buy there needs to be first-time sellers. If we can move first-time sellers up the ladder that can move the market. Remortgaging can be a form of creating activity in the purchase market.
Brian Murphy: We had a lender some time ago that allowed the transfer of negative equity onto the next purchase. It’s the kind of thing that needs to happen again as it can help people who have been good borrowers but, through no fault of their own, find their property is worth less than it was five years ago and they want to move on.
Jonathan Cornell: Quite often they need to move on for their job.
Boulger: From a lender’s perspective you might have customers with 5% negative equity who are allowed to port the mortgage and if it doesn’t increase as a percentage of the property, then their position isn’t any worse. If lenders are allowing someone to move home and subsequently get a better job their position is likely to improve.
Thibaut: When interest rates start to rise there will be a rush to fixed deals and there won’t be the supply to satisfy demand. It needs to be mitigated now by considering customers’ circumstances to see what can be done to ensure there is no payment shock in the future.
Montlake: It makes sense to offer borrowers a realistic fixed rate now to help them cope with the future shock from rate rises.
WHAT IS GOING TO MAKE BORROWERS REMORTGAGE?
Finlay: Considering that our research showed £50 may force people to think about moving deals it is not going to take a lot.
Montlake: Once interest rates move up many people will look at where the value is and that may be on five-year fixed rates.
Boulger: Even now I think that five-year fixes offer the best value. They cost 1% more but they offer three years more protection than two-year deals.
Montlake: Once rates move people will go for five-year fixed deals much more.
Murphy: Lots of borrowers would like a long-term deal but it depends on whether they can afford the cut in their disposable income. People go for two-year fixes because it’s what they can afford.
Boulger: Most borrowers will have taken out their mortgage before the financial crisis when the base rate was around 5% so they would have started paying above 5% even on a competitive two-year tracker. Unless they have seen a major deterioration in their finances they should be able to afford a fixed rate at 4%.
Round: People have adjusted their lifestyles. Just because the base rate has been 0.5% for over two years it doesn’t mean that they have been saving.
Anderson: We think borrowers can adjust to different circumstances. One of the main disagreements we have had with the FSA is that it underestimates the ability of borrowers to be flexible. Of course a rate rise is going to be a shock and borrowers must be ready but they can adapt.
Montlake: One product working well is Accord Mortgages’ two-year tracker followed by a defined three-year fixed rate. It is known that 4.4% will be a good three-year deal in a couple of years so it’s a decent product.
IS THERE MUCH DEMAND FOR INTEREST RATE PROTECTION PRODUCTS?
Boulger: MarketGuard has a two-year product but that isn’t long enough and it’s expensive. As it is a derivative we can’t advise on it because we’re not regulated. It’s a crazy situation that we can advise on a capped tracker but not for someone buying a tracker and a standalone cap. When caps were cheaper a few months ago we sold a few to our high net worth clients but it’s not a mass market product. The minimum loan size is £500,000.
Cornell: MarketGuard can’t offer more than two years because of capital issues.
Round: It would suit people who can’t remortgage but want protection against becoming mortgage prisoners.