26 Dec 2013 09:25 GMT
According to the latest analysis from Lloyds Bank, borrowers may no longer be better off staying on standard variable rates (SVRs). Since late 2008, falling SVRs lessened the gap with fixed rate mortgages and significantly reduced the incentive for many borrowers to remortgage. However, given the recent fall in fixed rates, some homeowners may find a better rate by remortgaging.
Whilst the total number of remortgages in 2012 was 12% lower than in 2011, there were some signs of improvement in the latter part of the year with a 7% increase in remortgaging activity between the third and fourth quarter.
The fall of SVR below fixed rates
Historically, remortgage activity has typically been driven by borrowers replacing their fixed home loans at the end of their term to avoid moving on to an SVR. This is because SVRs, on the whole, were more expensive and brought uncertainty over future monthly payments. However, this changed in recent years as interest rates fell to an all time low.
SVR on the rise, fixed rates on the fall
Even though SVR rates have generally been higher than fixed rates since August 2011, remortgaging activity on the whole has remained subdued, averaging 29,700 per month (37% of total mortgage lending). Over this period, the average SVR rate was 24bps more than average fixed rates (Fixed rates 3.96%; SVR 4.20%).
With fixed rates falling since August 2012, the incentive to remortgage should have increased. For example, if a homeowner took out a 2-year fixed rate in December 2012, their monthly payment would be £519; in the same month the payment on an SVR mortgage would have been £548.
Lloyds Bank cuts the cost of remortgaging for current account customers
Lloyds Bank is reinvigorating the remortgage market by reducing the rates on a number of its remortgage deals by up to 0.25%. As well as taking advantage of the free switching service which removes the hassle and expense of remortgaging, Lloyds Bank current account customers can also benefit from £500 cashback2.
The offer includes:
For example, a customer on a typical SVR of 4.38%4 based on a £100,000 loan would have a monthly mortgage payment of £549. If the borrower switched to a remortgage rate of 3.34% with Lloyds Bank, their payments would drop by £57 to £492 per month. Over the term of the mortgage, they would save at least £3,418 on a fixed rate compared with the SVR5.
The numbers around remortgaging
As Chart 1 shows, the sharp drop in remortgaging has coincided with both a decline in SVR rates and a reduced differential between SVR and fixed rates.
Chart 1 – Trends in Remortgaging Activity and SVR/Fixed Rates 2008-2012
Trends in Remortgaging Activity and SVR/Fixed Rates012345678Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12% Rate-20,00040,00060,00080,000100,000120,000140,000Number of RemortgagesNo. RemortgagesSVRFixed Rate
Source: Bank of England and the CML
At the end of 2012, remortgaging activity in the UK was just a quarter (24%) of the levels at the start of 2008 – 28,200 remortgages in December 2012 compared with 116,600 in January 2008. This fall of 76% was almost twice the 40% decline in house purchase mortgages over the same period.
Between January 2008 and October 2008, the number of remortgages declined to an average 86,800 per month, accounting for just over half (51%) of total mortgage lending6. In the same period, fixed rates were 113 basis points (bps) below the average SVR (Fixed rates: 5.97%7, SVR: 7.11%).
From November 2008 to July 2011, the number of remortgages fell further to an average 30,000 per month, accounting for two fifths (39%) of total mortgage lending. During this time, on average, SVR rates were 52bps lower than fixed rates, therefore significantly reducing the incentive to remortgage (Fixed rates 4.66%; SVR 4.13%).
Since the end of last summer there has been a slight revival in remortgage activity (rising by 7% between quarter 3 and quarter 4) as average fixed rates fell by 41bps (from 4.25% in August to 3.84% in December).
Stephen Noakes, Mortgage Director at Lloyds Bank, comments:
"With SVRs at historically low levels, many homeowners have actually found their mortgage payments have reduced at the end of their term and the incentive to remortgage has been reduced. However, as we start to see fixed rates dropping, prudent borrowers taking stock of their home loans could benefit from their monthly payments falling further.
"The Lloyds Bank switching service guarantees to take the hassle out of remortgaging. With our new rates and £500 cash back for Lloyds Bank current account holders, now is the time for homeowners to consider the benefits of remortgaging."