The success of one corner of the market is often closely linked with many other aspects of the housing market, and this is what we are currently witnessing. A perfect combination of low mortgage rates, robust competition from lenders, and consistent house price growth are all feeding remortgage activity.
So much so that our latest Q2 Remortgage Healthcheck Index – which is produced in partnership with the Centre of Economics and Business Research (CEBR) – rose by 4.8 points to 69.2 in Q2 2021, the highest score since Q2 2013. Our index tracks the four key components of the remortgage market: volume and value of remortgage approvals, remortgage borrowing costs, homeowner equity and borrower sentiment – all of which were in positive territory.
Remortgage approvals: A tale of two halves
Our Remortgage Approvals indicator neared an all-time high in Q2 2021 with a score of 70.2. This increase was almost solely driven by higher average approval values, which soared to 89% of the average house price.
This comes as property prices continue to climb across the UK, putting homeowners in stronger equity positions when remortgaging. According to UK Finance’s latest Household Finance Review, there has been a growing trend of withdrawing equity to invest in additional properties. This includes holiday homes, buy-to-lets, and also releasing funds for a deposit to help family members onto the property ladder.
This strong performance comes despite continually low approval numbers from lenders, which remain below pre-pandemic levels. The average number of approvals in Q2 was 28.8% lower than in the same quarter in 2019.
This drop off in approvals can, in part, be attributed to the impact of the pandemic, but also to the popularity of five-year fixed rate deals over the last half decade. In 2018, five year-fixed rates overtook two-year fixes as the most popular product type. As many of these mortgages start to mature in the coming years, it will be interesting to see if this translates into growing remortgage approvals.
Cost of borrowing stays low for consumers
Q2 saw a 11.5-point improvement in our Borrowing Costs indicator, taking it to 71.1, the indicator’s best level since Q1 2017. It also marks the first return to positive territory since the pandemic began.
The strong Borrowing Costs indicator score is promising, as Borrowing Costs measure the gap between lender’s own funding costs and the interest rates that they charge to borrowers. A high score, like the one we witnessed in Q2, suggests that borrowing costs are more favourable for consumers, which is evident from the record low rates of late, with several lenders having launched sub-1% mortgage deals.
Mortgage rates for two-and five-year fixed rate mortgages have decreased for a second consecutive quarter even though lenders are starting to see an upturn in their costs. This suggests that lenders are not yet passing these costs onto consumers – perhaps due to the stiff competition in the mortgage market and a desire to remain competitive by keeping their prices low.
Rising values strengthen equity position for many
The Home Owner Equity indicator rose by 3.1 points to stand at 77.8, the highest reading on record. This comes as house prices continued to soar ahead of the stamp duty holiday deadline, incentivising borrowers to bring forward purchases. Research from Zoopla revealed that the average house price now stands at £230,700 – a colossal 30% above the 2007 market peak. The same research also showed that house prices climbed by 5.4% in the year to June, edged on by a 25% fall in the volume of homes for sale in the first half of the year compared to the same period in 2020.
While some form of market slowdown seems inevitable with the SDLT exemption coming to a close, house prices are set to remain high due to the extreme imbalance between supply & demand and increased affordability due to record low interest rates.
Looking forward, the only factors that are likely to disrupt the upwards trajectory of house prices are inflation and interest rate hikes, which could cause the market to turn. However, until supply issues are resolved, inflated house prices are set to remain and we expect to see more borrowers opting to stay put in this environment, boosting remortgage activity and contributing to a healthy remortgage market for the rest of 2021.
Borrower sentiment still rising
The final but perhaps most telling aspect of our index is our Borrow Sentiment indicator, which has improved for the third consecutive quarter, bringing to yet another all-time high of 62.0.
This continued improvement was mostly driven by higher scores for consumer confidence. The YouGov/CEBR confidence index reached an average of 112.4 in Q2, its highest level since Q2 2016. This is likely caused by the easing of COVID-19 restrictions and financial support provided by the government and banking sector for households impacted by the pandemic which have prevented any significant increases in arrears.
The boost in consumer optimism was evident, with a record proportion of borrowers (52.2%) opting to increase their loan size when remortgaging. This is a positive sign, as it signals that borrowers feel confident about taking equity out of their property to fund other projects.
Looking forward
Looking to the immediate future, the sheer number of favourable indicators paints a strong picture and there is nothing to suggest a remortgage slowdown is on the horizon. Market conditions at present are all working in the remortgage sector’s favour. While it’s unlikely we will witness the cliff-edge predicted earlier this year, a potential hike in interest rates could pose a risk, especially if rising inflation forces the Bank of England to increase interest rates quickly and consumer confidence takes a hit.
This will have a knock-on effect on the remortgage market, and we expect to see borrowers looking to lock into a new fixed-rate deal before their current term expires to weather any price rises. As December marks the highest volume of ERC expiries in the year, we expect to see a flurry of activity in the coming months as people seek capitalise on the headline rates while they last.
Proactive lenders will be preparing for the year ahead by cleaning up their back books and completing any outstanding sales and purchase cases to free up capacity for remortgage completions. Those that do will have a great start to 2022.
Nick Chadbourne is chief executive of LMS
