Amidst the doom and gloom of the coronavirus, impending economic challenges and liquidity issues, there is a lending market which appears to be prospering. The refinancing of property has become an extremely active area of the market in recent weeks. This despite the fact the UK property market has all but frozen and the vast majority of transactions have been put on hold. So, why is the refinancing market so strong today?
Low interest rates
When the Bank of England reduced UK base rates to 0.1% this didn’t have a like-for-like impact on the mortgage market but did initially soften rates. While the European Central bank recently reduced its base rate to -0.5% it is more funding as opposed to interest rate cuts which will have the most impact on the economy. However, when it comes to refinancing assets many property owners have stepped forward to take advantage.
We know that the UK government has already put aside £330 billion to help businesses and there is an open cheque which will be in the billions of pounds to assist employees and anyone struggling. So, even if the UK economy was to bounce in the short to medium term the government would need to claw back significant income to make up for both tax revenue losses and funding made available during the coronavirus crisis. Many experts believe that UK base rates will remain relatively low for some time to come and could even move lower if there is a short-term seismic economic shock.
Traditional valuations
One of the main problems in keeping the whole UK real estate market “open for business” is an inability to carry out traditional valuations ahead of mortgage arrangements. Some companies are taking on-board desktop valuations using recent valuations in the area and historic patterns, but these are not perfect. Therefore, it was no surprise to learn that many mortgage providers have withdrawn some of the higher LTV offers from the marketplace. So, how can the remortgaging sector continue to thrive?
Low LTV ratios
As we mentioned in one of our earlier articles, the vast majority of those looking to remortgage their property are doing so on relatively low LTV ratios. If for example funds are raised on a 50% LTV ratio then this leaves headroom of 50% in the event that the UK property market was to fall in the short term. A fall of 50% is unlikely with some refinancing companies actually offering LTV rates up to 65% in certain circumstances. So, for the refinancing companies this is their bread and butter income. They continue to keep business rolling in, refinancing existing customers and bringing in new ones, by securing funding at rock bottom rates.
Summary
The main reason why the refinancing sector is able to continue pretty much as normal is because of the relatively low LTV ratios on the majority of refinancing deals. This allows for huge headroom should the UK property market fall in the short to medium term. As this is one of the more competitive/active areas of the marketplace, it has become extremely competitive with some excellent rates available. At the moment rates vary from between Bank of England base rate plus 1.5% up to plus 3%.
Whether simply looking to remortgage, or perhaps withdrawing equity for numerous reasons, such as investment and paying off loans, refinancing is an extremely competitive market at the moment.