In the past most borrowers had some form of fixed term mortgage where the rate was fixed often for 2 or 3 years. As interest rates fell in late 2009 the incentive to move to a new fixed rate deal diminished because standard variable rates were often very low.
The remortgage market dropped from over 100,000 transactions per month to less than 25,000 resulting in thousands of borrowers enjoying very low but variable rates.
Over the last few weeks some lenders have started increasing their standard variable rates putting pressure on many existing borrowers. On the 4th March Halifax raised its SVR from 3.5% to 3.99% following Royal Bank of Scotland who had increased their rates the previous week.
At the time some pundits were expecting these types of interest rates rises to be the catalyst to encourage borrowers to start remortgaging back onto fixed rates again.
Over the course of the last couple of weeks Santander and Nationwide have decided to withdraw from offering interest only mortgages to borrowers, unless the size of the loan is less than 50% of the value of the property. Today Nat West Intermediary Solutions have temporarily suspended interest-only lending altogether.
This effectively means that those interest only borrowers who have faced an increase in their standard variable rates may find it harder to obtain an interest only fixed rate mortgage to reduce the costs of their mortgage payments.
Richard Hinton, business development director of Property search firm SearchFlow said: “If the other major lenders follow the example of Nationwide and Santander, it will dampen the steady growth of remortgage lending we’ve seen over the last 12 months. The value of remortgage loans has grown on an annual basis faster than those for house purchase every month since January 2011, as falling property prices have caused lenders to take a cautious approach on purchases. Remortgaging has been boosted by interest rates currently close to record lows which are creating a powerful incentive for homeowners to use interest-only devices for equity release. But if LTVs are limited to 50% for interest only products across the market, prospective remortgagors seeking to maximise the size of the equity they can access will find their wings are clipped.
“Nonetheless, given the bad rap interest-only lending has received over the last few years, borrowers may count themselves lucky they can access interest-only finance at all. Low interest rates mean borrowers can use a larger chunk of their monthly repayments to service the principal loan and until SVRs begin to rise this will mitigate the impact on overall remortgage activity”.
Borrowing £100,000 at 3% on an interest only basis costs £250 per month but the capital remains outstanding at the end of the term. On a 25 year capital repayment basis the cost increases to £474.21.
Remortgage conveyancers who have seen an increase in activity in recent months may begin to wonder if it will continue or whether borrowers may become trapped.