Mitigating payment shock
By Paragon Bank
High levels of remortgage activity amidst increasing interest rates can mean payment shock but by being proactive we can help to mitigate the impact.
Back in 2017, new underwriting rules were introduced by the Prudential Regulation Authority (PRA), resulting in an increase in the number of buy-to-let landlords choosing five-year fixed rate mortgages.
This is relevant to today because, five years on, many of those mortgages have reached maturity or are soon to, leading to a surge in remortgage activity.
When borrowers were deciding to opt for the security of a fixed rate product five years ago, I don’t imagine anyone would have expected that their remortgaging would be done in an economic environment impacted by a global pandemic that has been quickly followed by the invasion of Ukraine by Russia.
With rates expected to peak in two years, swap rates - the price paid by lenders to other financial institutions to fix rates offered to customers, over an agreed period - have risen. This increases the cost of funding for lenders and even pricing some out of the market, unfortunately.
This has led to an increase in rates offered by lenders and means that on remortgaging, borrowers who again want the security of a fixed term product may be faced with higher monthly repayments than they are used to.
And it’s not just fixed rates that are affected.
Following the Bank of England’s incremental increases to the base rate of interest from the historically low level seen at the onset of the pandemic, Moneyfacts analysis revealed that the typical SVR has risen to 5.06% recently. This represents the highest level in the residential market in over 13 years, with buy-to-let rates tracking above this.
With further increases expected, the likelihood of borrowers experiencing payment shock grows. Any increase in mortgage payments is unwelcome but with the cost-of-living crisis already placing pressure on finances, it is even more important for us to support customers to minimise any negative impact.
At Paragon we’ve taken a proactive approach to this, adapting processes and implementing a number of initiatives.
We were amongst the first specialist lenders to extend the window in which customers are able to product switch, changing it from three to six months ahead of their current buy-to-let mortgage reaching maturity.
This process change was supported by increased customer communications, with landlords contacted seven months ahead of maturity and advised to speak to their adviser. Some were also offered pre-approved further advance products that were attainable through a streamlined application process, particularly useful for those wanting to act quickly to take advantage of strong demand for rented homes or upgrade the energy efficiency of properties in anticipation of proposed EPC regulation changes.
To help reinforce our belief that brokers are a crucial part of the lender and borrower relationship, we also increased procurement fees, from 0.30% to 0.40%, to increase the incentive for brokers who introduce product switches to our other buy-to-let mortgages.
By taking a similar proactive approach, brokers can help their customers secure finance ahead of further rate rises which is a way of providing a good service while generating business.
We know that over 40% of customers borrow more money on remortgaging and this usually requires additional underwriting which of course takes more time. This adds to the idea that it is beneficial for brokers to contact their clients sooner rather than later.
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