Private Finance's Mortgage Memo - 6th July 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.
- Borrowers consolidate debts used for home improvements during Covid
- Finally some rate reductions rather than increases
- Clients consider variable rates vs fixed rates
Borrowers consolidate debts used for home improvements during Covid
During the pandemic we saw more borrowing for home improvements in the UK, a trend intensified particularly by the shortage of adequate housing supply and homeowners looking internally at home improvements they could make instead of moving home.
Some people borrowed this money secured against their home as they needed to do a refinance of their home anyway or as a second charge, while others did a further advance with their current lender. But we are now seeing many borrowers did this on personal loans and credit cards with a view the premium of rate was worth paying for the space and they could clear them fast or refinance them at a later date. With how long the pandemic lasted and with the cost of living increasing, we are now seeing more enquiries or remortgages where clients are looking to consolidate those loans into their mortgage.
- Although the money borrowed was used for improvements to the property, they are taking a short-term debt and spreading it over a long term by consolidating this. Some lenders don't like doing debt consolidation for this reason and therefore restrict certain factors such as; the amount that can be debt conned, they may still take into account the background debt for affordability in case it is built back up, may not allow debt consolidation on a BTL or for interest-only borrowing.
- The costs-of-living crisis has increased the potential risk of borrowers defaulting on loans of unsecured debt, leading to lenders repricing the cost of this debt and increasing their rates in the second quarter of 2022, according to MoneyFacts. This appears to be mirroring the rises seen in mortgage rates, however debt consolidation may still be seen as a cheaper option due to the payments being spread, but the real cost is often significantly more due to spreading that debt over the longer term.
- In the second half of the year, we may see a rise in debt consolidation remortgages as homeowners use the equity from rapid house price growth to clear their debt balance sheet. For more information: https://www.mortgagestrategy.co.uk/news/may-sees-jump-in-mortgage-borrowing-boe/
Finally some rate reductions rather than increases
Since the end of 2021, mortgage rates have continually risen however, finally we are starting to see some small rate reductions from HSBC, Platform (co-op bank) and Coventry Building Society.
- The rate reductions from HSBC were not revolutionary, with decreases around 0.05%. These changes more so bring them in line with other lenders. Recently HSBC’s timescales have reduced, as well as other lenders in general, and they may be looking to attract new business by becoming more competitive again.
- Barclays have also introduced some more competitive products this week compared to other products in the market. Also, as a test they are allowing existing borrowers to lock in rates earlier ahead of their mortgage rate expiring.
- It isn’t all good news though, we are still seeing many lenders raise their rates also, so it is unlikely someone who applied for a mortgage a few weeks or a couple of months ago could now get a better rate.
Clients consider variable rates vs fixed rates
With mortgage rates continuing to rise in many cases, more borrowers have been preferring to fix their mortgage for a certain period typically opting for the 5-year fixed product to insulate against future possible rate rises. Recently however, we have noticed more borrowers willing to consider variable rate products on the basis that they do not expect these variable rates to rise above a certain level over the next 2 to 5 years.
- There are still 2-year discount rates available at 1.44% right now whereas 2- and 5-year fixed rates are around 2.99%+ and 3.09%+ respectively. With this different in rates and the tracker rate less than half of a fixed-rate product, we are noticing more clients consider variable rates, where they are willing to take the risk of potential rate rises over the next 5 years but take advantage of the better rates in the shorter term.
- These fixed rate products often come with ERCs, limiting flexibility if there is a change in the borrowers’ circumstances towards the end of the mortgage product. Tracker rates are often more flexible in terms of ERCs, so they could be a better option if a borrower was uncertain about their borrowing plans in the long term. For example, Newbury offer a 5-year variable rate at 1.84% with ERCs for only 3 years. Variable rates are financed in a different way, so it is important to understand the financial consequences compared to a fixed rate product.