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Private Finance Mortgage Memo
This is our take on what is currently happening in the mortgage market. Our views are often cited in several national publications, including; The Times, Telegraph, Financial Times, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.
- Falling fixed rates – Calls for borrowers to re-review and what it means for lenders
- Lenders increase ERCs as cost of funding increase
- Older borrowers downsizing and equity release mortgages
Falling fixed rates – Calls for borrowers to re-review and what it means for lenders
As fixed rate mortgages start to reduce, we urge borrowers who have applied for a fixed rate mortgage product since the mini-budget and are yet to complete on their mortgage to re-review and ensure there isn’t a better rate available for them.
Why should borrowers re-review their options
The lending environment is frequently updating, and many lenders have reduced rates and re-introduced mortgage products since the mini-budget and chaos in the mortgage market. There may be more options available in the lending atmosphere for borrowers compared to when they applied for their mortgage over the last two months, including more competitive options.
Do brokers re-review applications?
We hear some horror stories about other mortgage brokers who do not bother to re-view or clients who went direct to the lender for their mortgage who are unaware a better rate is available. Your broker will not necessarily review your mortgage application without prompt so make sure to do so. This could mean the difference of thousands of pounds saved and avoiding being locked into a high rate 5-year fixed mortgage with high early repayment charges.
What does this mean for lenders?
Changing your application to another lender or rate does cause lenders additional work as they may lose the business they have done over the last few months, however many accept that currently this is a cost of doing business. Some lenders may have room to reduce rates at the moment but don’t want to cause themselves extra work in changing existing rates if they do make changes.
The other side of this coin is there are very low barriers keeping clients from re-reviewing after offer if they have time, and so could move lenders
Lenders increase ERCs as cost of funding increase
From this week, Nationwide are increasing their early repayment charges (ERCs) as the cost of funding increases and lenders pass this cost onto borrowers. The changes increase the ERC charge by 0.5% in every year of the 2- and 3-year mortgage product with an ERC, and only the last three years of the 5- and 10-year mortgage product with ERCs, also by 0.5%.
What has happened to ERCs historically
We campaigned for lenders to reduce their ERCs when rates were historically low, however only the bigger lenders such as Barclays, Nationwide and NatWest changed their ERC models. Now that rates have increased, lenders costs of funding also increased, and so it does make sense for lenders to do this but will be a hit for borrowers in the future especially if rates reduce.
With borrowers in mind through, we do hope many lenders do not adopt similar changes, as this adds extra costs and reduces flexibility for clients. We recently actually saw Santander improve their ERC structure, going from a flat structure to tiered.
Older borrowers downsizing and equity release mortgages
It is a harder time for older borrowers than it has been for a while. There are fewer options for older borrowers, and of these options, they are significantly more expensive.
Although changes to the State Pension will benefit millions of pensioners across Great Britain, the cost-of-living crisis will stretch many household budgets, especially as we enter the cold winter months. In a high-rate environment, the cost of later life borrowing and equity release mortgages are higher, and as a result we could see more older people downsizing earlier, particularly with the extra temporary saving of £2,500 in Stamp Duty costs until April 2024.
Later Life Mortgages
Older borrowers have several options when looking to refinance, for example later life lending and equity release mortgages. In the present environment, later life mortgages are more expensive and as these are often interest-only they are more sensitive to rising interest rates. These payments could possibly double if a borrower needed to refinance right now vs a rate 2 years ago.
Equity Release Mortgages
While we don’t advise directly on equity release mortgages, when speaking with other advisers we are seeing that rates are a lot higher than they have been for a few years. We are also seeing the LTVs achievable on these mortgages are a lot lower due to the rates being higher. If the interest is being rolled up over a period of time, this impacts the LTV that is achievable.
Potential to free up housing stock
Older borrowers with larger houses have had little incentive to downsize in the past as Stamp Duty costs have meant the costs savings by moving into a smaller house are smaller. However, higher energy bills and the temporary savings on Stamp Duty could incentive many older borrowers to downsize, particularly those who cannot afford to refinance in the high-rate environment. We could see housing stock of larger homes freed up earlier than planned as a result.
