Despite the recent trend of falling fixed mortgage rates at the same time that a number of lenders are raising their standard variable rates (SVR), research has shown that borrowers are choosing to remain on their existing deals rather than remortgage.
What's going on?
- Research from the Halifax has shown that that in the last 12 months, the average SVR has become 0.18% more expensive than the average fixed rate mortgage.
- Yet, volume of people remortgaging has fallen 75% since 2007, despite the fact fixed mortgage rates have been falling.
- And this trend doesn't look like changing anytime soon with only 10% of borrowers saying that they would look to remortgage if their monthly mortgage payments went up by £25-£50. Similarly 13% would not remortgage until their repayments increased by over £100 a month. Amazingly 8% would wait until their repayments doubled before doing anything about it.
Why aren't borrowers remortgaging despite historic low fixed rate deals?
For a combination of reasons, aside from simple inertia. With the economy still spluttering, markets are now not pricing in an increase in the Bank of England base rate (which influences most variable rate mortgages) above its current rate of 0.5% until 2017 at the earliest.
Borrowers coming off fixed rates deals are enjoying cheaper mortgage repayments. Indeed some borrowers, are benefiting from the small print in their mortgage deal preventing their lender from increasing their SVR above a set percentage above the bank base rate. For example, those borrowers defaulting onto the Nationwide's base mortgage rate (BMR) enjoy an interest rate of capped at just 2% above the Bank of England base rate. With the prospect of the Bank of England base rate staying low for longer borrowers feel like they are being paid to stay put (in fact every customer who remains on the Nationwide's BMR costs the building society £1,000 a year) while also avoiding the costs associated with remortgaging.
Who should consider remortgaging?
Andrew Montlake, director of leading London mortgage broker Coreco, says:
"As a general rule it used to be the case that if any five year fix began with a 3, then you should grab it with both hands and never let go. Now they are starting with a 2! Even if rates stay low for 3 or 4years, with a product priced at 2.95% it is hard to see where any borrower would lose out dramatically,as long as flexibility is not a key driver.
For some however, it may not be so simple and care should be taken to weigh up the pros and cons. Some will find the mortgage market a very different place to when they took out their existing mortgage as changes in lenders criteria, especially around income verification and interest only for example, could cause issues.
Longer term fixes are also not suitable for everyone either. Although many deals will allow you to overpay up to 10% annually without penalty and are portable should you wish to move home, this still imposes certain limits on flexibility.
You also have to price in the costs involved as arrangement fees of over £2,000 can be charged, negating the benefit for those with smaller loans remaining. Nevertheless, there will be whole swathes of borrowers with equity and a good income who would have no such issues.
For anyone who is coming to the end of an existing product and moving on to their lender’s standard variable rate it is always worth looking around to see what else is available.
There is now a very good chance that you will find a cheaper product in any case and many lenders throw in a free valuation and legal fees to keep remortgage costs down."
Andrew is regularly is regularly quoted in the National Press with appearances on National TV and Radio. You can follow him on twitter @montysblog