Remortgaging gets tougher as affordability rules tighten

13th May 2014


A month-on-month slowdown in mortgage applications show the tightening of the lending rules is already hitting borrowers, and those remortgaging are feeling the brunt of the changes.

The Mortgage Advice Bureau (MAB) monthly national mortgage index shows a significant slowdown in remortgaging activity in April as remortgage applications fell 12% and purchase applications fell 7% – although combined they were still up 29% on last year.

The drop has been linked to the introduction of the ‘mortgage market review’ (MMR) which has seen stricter affordability criteria implemented since 26 April. As part of a regulatory drive to ensure borrowers are only borrowing what they can afford to repay, lenders are now required to ask in-depth questions about borrowers’ income and expenditure.

Banks and building societies will also have to calculate affordability based on increased future interest rates although mortgage rates are still at rock bottom thanks to low interest rates and the government’s Funding for Lending Scheme which made £80 billion of cheap money available to lenders. Even though the scheme was stopped for residential lending in January, the money is still washing through the system and keeping mortgages cheap.

The MMR has been in the pipeline for a number of years but its implementation comes at a pertinent time as the property market threatens to overheat and there are fears the government’s Help to Buy scheme is allowing buyers – particularly first-time buyers –  to overstretch themselves by borrowing 95% loans.

While there are concerns about the amount of mortgage debt first-time buyers are being saddled with in order to get a foot on the ladder, it appears the MMR’s impact is being felt mostly by those remortgaging. Those who are remortgaging are doing so with more equity thanks to recent house price increases – the average value of a remortgage property in April was up 6% from March to £299,375 and the equity put forward also jumped 10% from £124,375 to £137,178 over the same period.  

Younger buyers have not been dissuaded by the MMR and the average age of buyers has fallen to the lowest point since September 2010, from 37 years old to 36.9.

‘It’s a promising sign that confidence appears unshaken among younger borrowers. We have seen the average age of buyers seeking a mortgage slowly falling over the last 12 months, which is a symptom of greater opportunity and movement in the market,’ said Brian Murphy, head of lending at MAB.

‘A degree of slowdown was inevitable in the run-up to MMR, particularly given the exceptionally busy start to 2014. With applications up 29% year-on-year, the mortgage market remains open for business and in far better shape than it was a year ago.’

Mortgage deals

The MMR has not put lenders off launching new products, but the rates being offered are starting to edge up.

Figures from comparison site shows five-year fixed rates have edged up four basis points from 4% to 4.04% over the past year, with 0.2% of that rise happening in the past month as lenders ready themselves for the MMR.

Two-year average rates have increased 3.61% to 3.65% between March and April, and three-year averages have edged up from 3.95% to 3.97%. Both two and three-year deals are still cheaper than last year when they say at 3.83% and 4.17% respectively.

Sylvia Waycot of said whether buying or remortgaging, consumers should not make the mistake of thinking low interest rates mean mortgage rates will continue to stay low because the latter are actually based on ‘swap rates’.

The ‘swap market’ is used by lenders to trade ‘interest rate swaps’ that allow them to hedge the cost of lending at a fixed rate against a potential interest rate rise. Swap rates increase on the expectation of interest rate rises rather than an actual rise and are already increasing in anticipation of the Bank of England’s base rate rise next year.

‘Don’t make the mistake of thinking that we need a change to base rate to increase the cost of mortgages, as prices are creeping upwards now,’ said Waycot. ‘So if fixed rates are your preference, now is the time to fix.’



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