What the mortgage rate war tells us about the current state of the market
Danny Belton is head of lender relationships at Legal & General Mortgage Club
After several months of continual changes to both lending criteria and product ranges, the mortgage product war is now in overdrive.
Numerous lenders are offering sub 1% products and with the Bank of England holding the base rate at a record low, we could see this continue for some time yet.
At face value, we should welcome the emergence of these low-rate products as heightened price competition should also lead to product innovation as lenders look to differentiate themselves beyond cost, benefitting both borrowers and advisers.
This is welcome news as we could see rates fall further still in the coming months, with many lenders reportedly achieving better margins by doing so.
Lenders also have significant liquidity at present and have significant interest in lending even at these low rates. As a result, we may see price competition drives rates lower still.
The decision to offer these rates at lower loan-to-value (LTV) bandings also opens the door to more high LTV lending opportunities, in line with the PRA’s loan-to-income limits.
We are therefore hopeful that the emerging rates war amongst lower LTV products will also help those with low equity to access better deals.
As the UK entered its first national lockdown last year, we saw significant disruption to the housing and mortgage markets, with the ban on viewings slowing things to a near stop.
This uncertainty naturally led lenders to take a more cautious approach to their activities, which was reflected in the curtailing of products and criteria.
It’s fair to say that this also reflected their own challenges, as they adapted to remote working and the need to process several million mortgage payment holidays.
However, we’re now in a very different market. Lenders have had time to adapt to remote working, while the easing of social distancing restrictions and a much-improved economic outlook mean that higher LTV products are readily available. Consumer demand has also stabilised in line with the ending of the stamp duty holiday and easing lockdown restrictions.
We’ll undoubtedly continue to see purchase activity continuing to soften over the coming months but with demand continuing to outstrip supply significantly it is unlikely that there will be a sudden drop in house prices any time soon.
Refinance activity – product transfers and remortgaging – is also beginning to creep up as a proportion of overall lending and we can expect this to continue over the coming months. Also expect lenders to compete fiercely in this area.
The vibrancy and competitiveness of the mortgage product market is now at a level comparable to its pre-crisis conditions and that can only reflect the strength of its recovery in recent months.
Instead of talking about the lack of products, now the conversation has moved forward to which mortgage – of the many that are now available – is best for a given client.
This is a good place to be, and advisers now need to engage with customers to help them overcome uncertainties about their refinance journey. Our research found that as many as one in two borrowers
that took a payment deferral are now concerned about their decision and the options available to them. Advisers need to set the record straight on what is actually out there.
We also found that under a third (29%) of borrowers think that 2021 is a good year to remortgage. With more than a handful of sub 1 per cent mortgages on the market, and rates at higher LTV bandings also at historic lows, we know that this year is actually an ideal time to refinance.