Private Finance's Mortgage Memo - 18th May 2022
is our take on what is currently happening in the mortgage market. Our views
are often cited in several national publications, including; BBC News, The
Times, Telegraph, City AM, 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.
- Large increase in porting applications to keep competitive rates
- Broker business models impacted by clients opting for longer-term lending
- BTL mortgage demand high as landlords look to take advantage of rental demand
Large increase in porting applications to keep competitive rates
We are seeing an increase in porting applications which are normally used to avoid early repayment charges (ERCs). This is due to the increasing interest rate environment we are in, where mortgage rates are significantly higher than they were two to three years ago, and borrowers seek to hold onto their existing mortgage products if there is time remaining on them which are more competitive than any new offerings.
- Previously when someone had a 2-year fixed rate at say 2% and we could get them a new 2-year fixed rate at 1.5%, then the ERC (early repayment charges) they would have to pay was not too much of a hardship. However now the interest rates are higher, and people are faced with losing their existing lower rate and having to pay an ERC simultaneously, unless they are porting the mortgage if they want to move property.
- While porting is an effective way save on ERCs for the right borrower, it is not necessarily the right option in the long term for everyone. It is quite easy to become trapped with the same lender that may not be the most competitive or have pay an ERC or SVR at some stage, especially if your lender does not offer you top ups on a tracker rate product.
- For instance, if a client required additional borrowing on a ported mortgage when purchasing a more expensive property, they will need to take out a second mortgage product to top up their loan amount. If a client then had two fixed rate products, it is highly unlikely these will mature at the same time and when the initial product matures, they are either going on to SVRs or they have to apply to that same lender for a new product. Unless that lender offers tracker rate products with no ERCs, they could get trapped with the same lender, refinancing every few years with fees involved in this too.
Broker business models impacted by clients opting for longer-term lending
At present, many mortgage broker business models rely heavily on repeat business and clients remortgaging every two to three years once their fixed mortgage rate ends, when they then roll off onto a higher SVR. However, with more clients opting for longer-term fixed rate mortgages and on average choosing a 5-year (and longer) over a 2-year fixed rate product, demand for remortgages will reduce and thus brokers business models must adapt or face issues further down the line.
- The preference for longer term mortgage products is due to a combination of clients looking for stability over their mortgage payments as mortgage rates continue to rise with the base rate and second, a change in the institutional cost of borrowing with longer term rates highly competitive.
- As the 5-year fixed becomes the norm, business models will have to adapt and focus on retaining existing customers in a highly competitive market and may have to focus on attracting more new business.
- However, while there may be fewer remortgages required, demand for specialist lending where clients’ circumstances have become more complex has increased due to the pandemic and constricted affordability and thus more clients could need a mortgage broker going forward.
- This trend in longer-term rates could lead to new products of 15- and 20-year fixed rates as more clients lock in at stable competitive mortgage rates, in which case the whole business model of mortgage lending would need to be reformed.
BTL mortgage demand high as landlords look to take advantage of rental demand
We have noticed a recent spike in buy-to-let mortgage enquiries, in which investors seek out pockets of competitively priced investment properties across the UK and are attracted to the stark rises in rental prices, with Zoopla reporting a 15.7% annual rental growth in London.
- We have seen increased demand since the end of Covid restrictions as the so-called “race for space” is now the race for city centre properties as the status quo resumes.
- Despite a market seeing significant rate rises, BTL rates remain highly competitive, another significant factor driving demand for these products.
- We believe Rent rises will stabilise in the near term as people's affordability is further constrained by inflation and rising costs across the board.