The UK remortgage market has been extremely active over the last decade, since worldwide base rates hit historic lows. Even though base rates have started to creep higher, many experts believe it will be some time before they get anywhere near their traditional levels prior to the 2008 US sub-prime mortgage sector crash. As a consequence, it makes perfect sense for homeowners across the board to at least investigate the opportunities to remortgage their property and reduce headline interest charges.
Even though some property markets around the world have struggled since the 2008 US mortgage crisis, many luxury property markets have enjoyed significant growth. As a consequence, when remortgaging it may also be possible to utilise a degree of the increase in property values in recent times. Assuming you’re able to secure relatively low mortgage rates, fixed for two, five or even 10 years, there is the opportunity to slash mortgage payments and increase net investment returns in the longer term.
What is the remortgage process?
The process of remortgaging is extremely straightforward and much quicker than in years gone by. There will be opportunities to remortgage with an existing lender or to transfer your business to a third party offering a more competitive deal. The Internet is extremely useful for comparing and contrasting headline interest rates but there is more to consider with additional charges, early redemption penalties, affordability and other issues coming into play.
Here at Enness we can find the best deal to suit your situation and your prospects for the future. As we will cover later on in this article, not only is there the ability to bring in multiple worldwide income streams but also utilise your whole asset base. The greater the degree of security for lenders the more chance of negotiating a more competitive rate compared to the headline offer.
UK base rates, mortgage rates and market trends
As we touched on above, UK base rates have been at or around historic lows for the last decade. We are still feeling the after-effects of the 2008 US mortgage crisis which brought the worldwide economy to its knees. The two graphs below show the massive divergence in UK interest rates since the 1970s and the flatline low in recent times. UK base rates hit a low of 0.25% in 2017 and today stand at 0.75%. In the context of UK base rates in years gone by this offers many people the opportunity to remortgage their homes at significantly reduced rates.
The following graph gives an indication of fixed two-year, fixed five-year and fixed 10 year remortgage rates for loan to value ratios of 65%, 75%, 80% and 90%. The fact there is little difference between 65% loan to value and 80% loan to value indicates the competitive nature of the UK remortgaging market. Rates increase a little more with a 90% loan to value which reflects the additional risk to the lender.
The next graph covers standard variable rate mortgages and two year fixed mortgage rates (75% LTV) between 2007 and 2018. As you can see, while the standard variable rate effectively flatlined from 2009 at around 4%, there has been a continual fall in the two-year fixed rate which now stands at just under 2%. It is unclear at this moment in time whether the recent upturn in two-year fixed rates marks the end of cheap mortgages in the UK or is a mere blip. Many experts believe that relatively cheap fixed-rate mortgages will be available for some time to come and with the current uncertainty surrounding Brexit this opinion is certainly gathering momentum.
A recent survey by UK Finance (https://www.ukfinance.org.uk/data-and-research/data/mortgages/product-transfer) has cast a very interesting light on the mortgage product transfer market. This is in effect the number of customers who transfer to different mortgage products offered by their existing lender. Some of the highlights of the survey include:-
• In 2018, a total of 1.6 million borrowers switched products with existing lenders or remortgaged with new lenders
• A total of 1.18 million homeowners refinanced mortgage debt with their existing lender during 2018
• A staggering £158.7 billion of mortgage debt was refinanced with existing lenders
• Of the £158.7 billion of mortgage debt refinanced, 54% was on an advisory basis and 46% execution only
• In total, almost one in five homes were involved in remortgaging or product switching in 2018
This shows the extremely strong appetite that UK homeowners have for remortgaging deals and taking advantage of historically low two-year, five-year and 10 year fixed rates. One note of caution, when looking to remortgage your property you should be aware of any early repayment penalties or additional charges which may reduce the attraction.
The Financial Conduct Authority (FCA) is growing more concerned about so-called “mortgage prisoners”. These are individuals who took out mortgages prior to the new affordability calculations and due to the change in regulations are unable to transfer to more competitively priced products.
Initially, in light of the introduction of new affordability calculations in 2014 there was an industrywide transitional arrangement. This effectively meant that mortgage customers looking to switch like-for-like would be able to do so without undertaking the new affordability review. Initially this was deemed acceptable for not only internal product transfers but also transfers to other mortgage providers. We then saw the introduction of the Mortgage Credit Directive in 2016 which led to a change in stance from the regulators. In essence, the transitional arrangements used when switching between different lenders were deemed no longer valid.
The FCA estimates that around 140,000 customers are affected by this inability to transfer to more competitive third-party products because they would not pass the new affordability assessment. In a perfect world, those in this situation would still be able to benefit from the relatively competitive mortgage market of the UK. However, changes in the industry have led to some mortgage providers taking a step back and a relatively benign stands towards competitive rates. This means that not only are around 140,000 mortgage customers currently locked into their existing deals but many of the rates are significantly out of sync with the market trend.
There are ongoing plans to address this problem and some mortgage customers have been transferred to more competitive products. However, it will take some time to work through the affected customers and arrange transfers.
Should you speak to your current lender about a product transfer?
There are two main options with regards to remortgaging; firstly look at transferring to another mortgage product with your existing lender. The second option is to take advantage of low introductory mortgage rates with other lenders often fixed for two-year, five year or 10 year periods.
Approaching your existing lender
The UK mortgage market is extremely competitive as you will see when you compare headline interest rates, introductory offers and fixed term deals. So, if your mortgage is coming out of a fixed interest rate period, and you are looking to remortgage at a competitive rate, the first port of call should be your existing lender. If you can identify a better offer in the marketplace they may agree to match their competitors or in many circumstances they may have a more competitive mortgage product in-house.
There are numerous benefits from a borrower’s point of view in staying in-house. A simple product transfer is the most cost-effective way in which to secure a reduced rate. In the vast majority of cases there would be no legal or valuation fees for example as this is simply the transfer of an existing customer. When you consider the significant legal fees, valuation fees and other expenses which can mount up, there are potentially large savings to be made.
Switching to a new lender
There will be scenarios where your existing lender may not be in a position to match the rate of a competitor. We have seen the emergence of private banks and crowdfunding operations which have caused significant disruption to markets due to their competitive offers. When switching to a new lender from your existing mortgage provider it is vital that you check any potential fees for paying up your current mortgage and taking out a new one. It is also worth checking to see whether the third party mortgage company is competitive on their standard mortgage interest rate compared to the general market – at some point you may need to switch to the standard rate.
We have seen scenarios where the headline interest rates look attractive but when you take into account restrictions and additional charges, this can narrow the advantage. While there is no figure set in stone, there needs to be a significant saving when switching mortgage products midterm to make it worthwhile.
Benefits of long term fixed rates
Looking back at the historical trend in UK base rates, it is difficult to find a similar period which offers such benefits to those looking to remortgage and fix rates for two years, five years or even 10 years. While UK base rates have increased from 0.25% in 2016 to the current level of 0.75%, this is still historically very low. Some of the main benefits of long-term fixed rates include:-
• Fixed monthly payments
• Protection from short to medium term interest rate fluctuations
• The ability to undertake financial planning with a degree of confidence
It is important to look at each remortgaging deal in isolation and consider the benefits of relatively long-term certainty of payments against potential penalties. You will come across some remortgaging packages with a fixed term of two years, five years or 10 years with penalties for early repayment and charges for overpayments. That is not to say you should not consider deals where there are penalty clauses but you should consider all elements of the deal.
We have built up an array of very strong relationships with both high street banks and private banks. This has allowed us to negotiate some very attractive remortgaging terms for many of our high net worth clients. We tend to find that fixed rate mortgages work better for those who have no plans to move home in the short to medium term – therefore avoiding repaying their mortgage early and potentially exposing themselves to penalties.
Using assets under management to secure favourable terms
While high street banks tend to be limited with regards to the products, terms and rates they offer, although often still competitive, private banks tend to be more flexible on terms, conditions and deal structure. You will often find that mortgage lending is not the primary activity of many private banks therefore they prefer to build a wider relationship with high net worth individuals. They will often require a remortgaging customer to transfer some of their assets to the private bank management division in exchange for favourable remortgaging terms.
The exact benefits of securing attractive remortgaging rates by utilising assets under management are not set in stone. We have significant experience in negotiating the best terms for our customers, taking into account their assets and remortgage requirements. It is the ability to create a remortgaging package around the customer’s financial situation which allows us to secure the best terms. On occasion we have managed to negotiate assets under management to be financed by remortgaging funds but traditionally private banks will require evidence of additional resources.
What happens if your circumstances change?
If your financial situation changes dramatically it is certainly advisable to inform your lender as soon as possible and discuss any potential adjustments required. The earlier you are able to advise your mortgage provider of changes in your life the more accommodating they tend to be. Some of the more common changes in circumstance include:-
• Move overseas
• Starting a company
• Investment opportunity
There also seems to be a general assumption that if you change employment then you need to inform your mortgage provider. This is not always the case because if you are moving on a like-for-like basis with a broadly similar income package, or salary increase, this will have no impact on your ability to cover your mortgage payments.
However, it is advisable to speak with your mortgage broker on a regular basis to see if there is scope to reorganise your financial affairs. If your income has increased then there may be the opportunity to pay down expensive debt such as personal loans. It may also prove beneficial to make one-off payments toward your mortgage capital, thereby reducing your long-term interest charges and financial liabilities.
Using your asset base to prepare the best solution/plan ahead
When looking at remortgaging, or any type of financial transaction, there is one simple equation which will dictate the decision and the terms offered by your mortgage provider, the risk/reward ratio. In a perfect world mortgage providers would prefer to have collateral above and beyond their financial risk. This ensures that in the event of unforeseen circumstances there will be sufficient assets to cover outstanding liabilities. So, how can you maximise your asset base to secure the best remortgage deal on your property?
It is worth remembering that initially the decision to offer mortgage finance will depend upon your income and ability to pay. The introduction of various assets as collateral is in effect the “cherry on the cake” because it will allow a degree of negotiation and improved terms. We have been negotiating with mortgage providers for many years now, taking into account not only worldwide assets held by our clients but also multiple foreign currency income streams. This is where many of our competitors often take a backward step, preferring not to unravel what are potentially complicated cases. We take a different approach, tackling the issues head on and looking to match the client with the most appropriate lender.
As well as healthy relations with high street banks we also have regular dealings with private banks, private equity firms, hedge funds and family office lending facilities. We know the kind of assets they can work with, the financial margins there require and how to present your financial situation in the best light. The fact that we would also approach them with an appropriate deal structure in mind helps not only with the decision making process but also the overall timescale.
Remortgaging not limited to residential property
While the term remortgaging is strongly associated with residential property, it offers the opportunity to refinance an array of other assets. These include:-
While the mortgage market for commercial property is not as strong as the residential market there are still opportunities for businesses to remortgage on improved terms. Very often funds raised can prove beneficial for the underlying business, especially with interest rates so low. It will obviously depend upon the type of commercial property and the underlying business but there are certainly opportunities to reduce mortgage payments.
When looking at development finance just a few percentage points either way can make a big difference to the long-term cost. If you’re able to remortgage and fix interest rates for two, five or even 10 years, this can make a huge difference. The opportunities to remortgage will obviously depend upon the potential for the development, cash flow and any collateral which can be lodged.
Bridging finance tends to be a relatively short term form of finance, anything from just a few days up to 12 months and potentially extended to 18 months. The average bridging finance loan tends to be around six or seven months in duration. The opportunity to refinance at a lower rate can have a huge impact upon the eventual return on investment.
While concentrating on your business it is very easy to get caught up in the day-to-day activities and ignore the potential to reduce your financial outgoings in the longer term. As UK interest rates remain at near historic lows this has injected a degree of competition into the business loans market. If your situation supports a refinancing/remortgaging of your business loan then it is certainly worth investigating further.
While many people automatically assume that remortgaging international property can be complicated, this is not always the case. We have long-standing experience in the international property market and relationships with literally hundreds of lenders in the money markets. Therefore, overcoming country boundaries, residency difficulties and even currency issues is not a problem. We may need to approach niche lenders for the best deals and they often charge a small premium to service a complicated financial situation. However, we are confident in our ability to negotiate the best deal for you.
Outlook for UK base rates
It is fair to say that with UK base rates currently standing at 0.75%, and not forecast to increase in the short to medium term, competition will continue to grow in the remortgaging/refinancing sector. As a consequence, it is vital that you investigate the potential to in some cases significantly reduce your short-term mortgage payments with a fixed term of two years, five years or even 10 years.
While the majority of people will simply switch mortgage products at a more competitive rate, there is also the opportunity to raise additional finance where you have equity in a property. While any investment carries a degree of risk, buy to let investments as one example are currently offering rental yields well in excess of deposit account interest rates. While it is sensible to utilise your assets to maximise your long-term returns, there needs to be headroom in the event of unforeseen circumstances in the future – an insurance policy in all but name.
How can Enness help you?
The first thing to remember is the fact that we are an independent mortgage broker which means we have no ties to specific parties. This lack of restriction allows us to talk to any lender and find the best deal for you. We have strong relationships with:-
• High street banks
• Private banks
• Niche lenders
• Private equity finance
• Hedge funds
• Office lending facilities
While it is fair to say that some high street banks have reduced their risk exposure to the mortgage market – with strict affordability calculations – they can still be competitive for vanilla remortgage arrangements. Private banks and niche lenders tend to be a little more flexible with regards to affordability calculations, as they are funded in a different manner to high street banks. As a consequence, even the more complicated financial scenarios do not need to be a barrier to remortgaging.
There is even more flexibility across private equity groups, hedge funds and office lending facilities. They tend to consider proposals on a case-by-case basis as opposed to attempting a one size fits all approach. Outside of the high street banks there is often the potential for lenders to build a personal relationship with customers going forward which can expand into different areas to the benefit of all parties.