We can all be guilty of choosing the easy option every now and again, when it comes to both our lives and our finances. But mortgage borrowers could be short-changing themselves by opting for product transfers with their existing lender, rather than searching the market.
Nick Chadbourne is chief executive of LMS
We can all be guilty of choosing the easy option every now and again, when it comes to both our lives and our finances. But mortgage borrowers could be short-changing themselves by opting for product transfers with their existing lender, rather than searching the market.
While the number of people choosing to remortgage rather than use a product transfer is growing, huge numbers of borrowers could be missing out on potential savings. The average borrower who remortgaged in July saw a £124 decrease in their monthly payments.
New mortgage rates have dropped even further since then, with rates now as low as 0.83%.
Average rates have also fallen, with the typical 2-year fix dropping from 2.55% in July to 2.52% in August, according to financial analysts Moneyfacts. The average 5-year fixed rate loan also fell over the same period, moving from 2.78% down to 2.75%.
Falling rates could lure buyers into taking a product transfer, even though a full remortgage would save them even more. Often this happens as lenders will write to customers a few months before their deals expire with a product transfer offer.
While remortgaging is typically more time consuming and can often have higher fees, product transfers can still be more expensive in the long run, as remortgaging offers borrowers the opportunity to shop around for lower rates.
Just like lenders, mortgage brokers should be proactively contacting borrowers to ensure they are receiving the best advice about if and where they should move their loan.
Freeing up equity
A key driver for remortgaging remains the desire to release equity, and in July 49% of borrowers increased their loan size.
Many would have been taking advantage of house prices that have risen significantly in the last year. According to the Office for National Statistics, UK average house prices increased by 13.2% in the year to June 2021.
This was the fastest annual growth rate the UK has seen since 2004. The average house price hit £266,000 in cash terms, which is £31,000 higher than at the same stage in 2020.
Borrowers who released equity typically withdrew about half that rise from their homes, with an average loan increase of £16,389. However, 35% saw no change in their total loan size and 16% reduced the size of their loan. Those who lowered their loans did so by an average of £8,144.
5-year fixes remained the most popular product choice for remortgage customers in July, with 45% of those who remortgaged choosing to lock their interest rate for half a decade.
As ever, conditions for borrowers can vary dramatically depending on where in the country they are based. The average remortgage loan amount in London and the South East was £295,505 in July. This compares to an average of £145,950 for the rest of the UK.
Cashing in
July was the first month after the stamp duty holiday taper was introduced at the end of June, and this perhaps moved the mortgage market’s focus back towards remortgaging rather than purchase loans.
Borrowers were split between those who felt comfortable both increasing their mortgage repayments and those who took the chance to cut their monthly outgoings. In total, 43% of customers increased their monthly remortgage repayments versus 41% who reduced their outgoings.
Those who saw payments increase did so by an average of £261, while those cutting their mortgage bills saw a decrease of £124 from their housing costs each month.
Overall market health
July proved to be an encouraging month for the remortgage market, with the number of borrowers choosing to move their loans on the rise.
Confidence in the housing market remains strong, despite the withdrawal of some stamp duty tax savings at the end of June. Low mortgage rates have encouraged many borrowers to switch to a cheaper deal and that should continue for the months to come.
