John Wriglesworth takes a look at the current remortgage market and compares it to 12 months ago
Britain has definitely been bitten by the remortgage bug. Homeowners are increasingly reluctant to pay standard variable rates and are confident and financially astute enough to shop around for the cheapest way to finance their home – so much so that in 2004 the remortgage market accounted for 42 per cent1 of mortgage lending.
Despite a reduction in remortgage activity after the interest rate increases of 2004, lower levels of activity in the housing market (including continued lows in first-time buyers), continued low interest rates and the large number of homeowners coming off their fixed rate or discounted variable rate deals will mean the remortgage market remains healthy in 2005.
The April Your Move Remortgage Index, that tracks savings achieved from switching from a £100,000 standard variable rate mortgage (presently averaging 6.59 per cent) to the Best Buy2 mortgage, revealed the differences between the types of mortgage as well as the changes that have occurred in the market over the last 12 months.
Comparing two and five-year fixes
The first year savings achieved by switching to the Best Buy2 five-year fixed rate mortgage are now £1,290, up 6.6 per cent from a month ago (23 March) and up a staggering 5.4 times from 12 months ago (£240). See table 1.
This reflects a growing realisation in the market that interest rates are now unlikely to rise significantly further given the signs that the economy is responding to the Bank of England’s interest rate medicine more sharply than anticipated.
In addition to this, competitive pressure among lenders who have seen slower mortgage volumes of late is pressing them to offer more attractive rates.
By contrast, first-year savings achieved by switching to the Best Buy2 two-year fixed rate mortgage have remained the same over the last month at £1,410 but have nevertheless risen an impressive 86 per cent over the last year.
Overall, the savings on two-year fixed rate deals are still greater than for three or five-year mortgages but borrowers face the risk that rates might move against them by the time the two years are up. See Table 1.
Discounted variable rate
Whereas two-year fixed rate first-year savings have remained the same since last month, the savings achieved by switching to the Best Buy2 two-year discounted variable rate have fallen by 4 per cent, from £1,740 to £1,670.
This follows a year-long trend of falling benefits from switching to this type of mortgage (savings of over £1,830 were achieved 12 months ago. See Table 2).
Conversely, the first-year benefits offered by five-year discounted variable rate deals have stayed at £1,440 since last month and have remained broadly the same over the last 12 months, increasing just 3 per cent. See Table 2.
We can see that even though discounted variable rates currently offer higher first-year savings than fixed rates, the trend has firmly seen fixed rates getting more and more attractive in relative terms.
If the savings do move closely into line, borrowers who choose a discounted variable rate would only logically do so if they believed that interest rates were going to come down.
Fees
Fees remain a more controversial area. As mortgage volumes slowed, and perhaps also owing to the increased costs the introduction of mortgage regulation brought, lenders attempted to increase fees.
Competitive pressures have more recently pushed fees down again, although lenders are apt to promote headline grabbing interest rates with a sting in the tail that is less visible – high arrangement fees.
The trend of remortgaging is set to continue in the next 12 months as Jon Round, remortgage analyst at Your Move, comments: “Lenders have noticed that business has been slacker in recent weeks and the election certainly had an effect.
“Voting for a government always depresses activity in the housing market and 2005 is no different. What’s more, with signs of a cooling economy, the bond markets are less jumpy about interest rates than they have been and that has seen long-term interest rates fall, bringing five-year mortgage rates down with them and making them look increasingly attractive relative to standard variable rates.
“Lenders are enticing borrowers with better offers in an attempt to increase business. Canny remortgagors can take advantage of this.”
1Source: The Council of Mortgage Lenders
2Source: Moneyfacts 23 April 2005
John Wriglesworth is managing director of the Wriglesworth Consultancy
