From ‘interest only’ to ‘no interest’?

Imagine taking out a mortgage and not only having to pay no interest, but actually being paid by your bank to borrow. It sounds like something from a Carlsberg ad, but it is the reality at present in Denmark, where negative interest rates are in place.


Jyske, for instance, the third largest bank in Denmark, is offering a 10-year deal at -0.5 percent a year. In this scenario, if you borrow £100,000 (or 824,000 Danish Krone) to buy a house, you end up paying your bank back less than that amount. Probably the best mortgage in the world? The Danes seem to think so, with mortgage demand in the country on the rise.

So, will we soon see Carlsberg style mortgage ads on local TV screens? Well, don’t crack open a celebratory lager just yet.

In the UK, the Governor of the Bank of England, Mark Carney, has all but ruled out negative interest rates any time soon (as he also did previously in 2016). However, rates are so low that consumers are still being encouraged to borrow, or refinance existing debt.

One factor is that the Bank of England Bank Rate in the UK (what consumers would understand as Base Rate) is still at one of the lowest levels in history, and this sets the context for the mortgage market. The other factor is that the mortgage market is so competitive that lenders’ margins are being squeezed to the benefit of borrowers.

This is evident in the latest mortgage figures for the Northern Ireland market, where one of the most striking facts is the apparent recovery of remortgage activity. The data points to remortgage activity being up by more than a fifth (year-on-year) in the first half of 2019. This follows a 10-year period when remortgaging was in the doldrums. After a major spike leading up to 2007, remortgage activity fell by 85 percent between 2007 and 2013.

The level of negative equity in this period meant that for many, remortgaging simply wasn’t an option – they were effectively mortgage prisoners. For many others, good deals were limited and getting something better than they already had wasn’t possible. Indeed, many people were actually rolling off really good deals to worse ones – such as from ‘interest only’ to ‘compulsory repayment’. Interest only mortgages have effectively died out.

The remortgage market is now the fastest growing sector of the NI mortgage market, with the number of loans surging by 16.5 percent y/y in Q2. Remortgage activity (5,590 loans) is now growing at almost six-times the growth rate for the UK market.

So, have we gone full circle to pre-2007? In short ‘no’. There are some similarities in that the remortgage market is now the dominant segment of the market (just ahead of the first-time buyer market which is currently at a 14-year high) but the reality is that it is still a shadow of its former self. The level of remortgage activity is still only one-third of rates in 2007.

Back then, the growth in remortgaging was driven by the booming housing market. In the space of two years between 2005 and 2007, we saw house prices more than double. This created a situation where equity was overflowing and people felt like they had been gifted a bonus cheque that they could cash. Remortgaging was used to access cash to double-down on more property investment and on luxury spending such as fast cars. Significantly, nobody seemed to care about the interest rates though. Bank Rate at this stage was around 5.75 percent, so cheap money wasn’t the driver; it was access to equity and credit.

Today, it’s cheap money that is the main factor (albeit with stricter lending standards), alongside the fact that the equity tank has been filling up. Houses prices from their low in 2012 have increased by 40 percent, meaning that many people have now built up equity that they lacked after the crash. Clearly the passage of time and repayments is facilitating this too. And what people are doing with the money they are releasing through remortgaging is somewhat different than in 2007.

Buy-to-let is no longer the attractive proposition it was back then; stamp duty is now more punitive on second-homes / investment properties, as are other taxes. Car sales are also only three-quarters of what they were in 2007.

So, what are people doing with remortgage finance today? Statistical evidence on this is limited. However, one likely possibility is home-improvements and extensions (given that the home-mover market still remains very subdued). Helping finance children through university or onto the property ladder is another. Others are also simply refinancing existing mortgages to get a better deal, therefore reducing their outgoings and tidying up their finances.

So, the recovery of the remortgage market is the most striking aspect of the market at present. However, overall, we have something of a three-speed market happening. On the one hand remortgaging is seeing strong growth, albeit off a low base. The first-time buyer market is still recording steady growth from a 14-year high. On the other hand, the home-mover market remains very subdued with little sign of recovery. We also have a much more cautious market overall than we had in the past. This can be seen in what people are doing with their remortgage finance. But it can also be seen in the fact that the vast majority are opting for a fixed-rate mortgage and the certainty it provides.

Looking ahead, with some economic uncertainty, this could act as a dampener on the mortgage market as a whole, but it seems that the remortgage market won’t lose its fizz any time soon. Indeed, it will likely be the strongest performer in the market for the foreseeable future.

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