Our mortgage team is keeping an eye on the property market and changes to interest rates to make sure we can help you adapt your finances to today’s volatile conditions.

With interest rates already at all-time lows before the covid-19 outbreak and then falling even lower as part of the recent central bank and government stimulus packages, it may be time to look at your mortgage. You might find that you can fix your rate, move provider for a better variable rate or take out a mortgage on a property that has not previously had one. In times of crisis it is important to remain optimistic, and look for silver linings where possible.

The property market

Ahead of the crisis, property prices in London, Paris, Geneva and the Cote d’Azur were all picking up to varying degrees. Inevitably, viewings and transactions have since slowed dramatically.

Although we cannot know what the long-term effects of covid-19 will be on our economies, we can feel reasonably sure that our lives will return to normal. Our hope  is that the residential property market will  see activity pick back up in spring 2021. The holiday property sector could take longer to recover as the disruption caused by the coronavirus eventually fades. In the long term, property as an asset class  performs very well and with interest rates so low, investing in property remains compelling.

The mortgage market

In the UK, where a variable rate mortgage is still the preferred product in the jumbo mortgage space, one silver lining is that the drop in the base rate has been passed directly onto borrowers.

Retail banks are already withdrawing tracker products and there is a chance that margins will start to increase just as they did after 2008. That is because risk managers may tighten their belts if this level of market volatility continues, just like they did during the financial crisis. At the time, 95% of mortgages were paying interest that was less than 2% above the Bank of England base rate but within a year this figure had fallen to just 12%.

In Q1 2008 95% of mortgages were less than 2% above the Bank of England base rate, very similar to the 87% in December 2019. But by Q4 2009 that figure had fallen to 12%.

Source: J.P. Morgan, as of March 2020
Chart 1 – A graph showing the percentage of gross advances above BOE base rate. A blue line shows the increase in those that are less than 2%.

Where do we go from here?

Given the recent fall in the base rate, now is a good time to pause and review your financing arrangements. Could you reduce your costs by refinancing or fixing your mortgage? Or would it make sense to take out a new mortgage to free up some liquidity?

Source: J.P. Morgan, as of March 2020
Chart 2 A graph showing the continued decline in mortgage refinancing rates for the UK, France and Switzerland

Even if your mortgage is not about to mature soon, it may make sense to refinance. Terms and conditions vary, and it’s important to factor in all fees and conditions when deciding whether it’s the right decision.

Here are five reasons why remortgaging now could make sense for you:

  1. Reduce your borrowing costs. Switching to a lower rate should mean lower interest payments. But the total potential saving is a function of all the costs, such as any early repayment charges and arrangement fees (see case study). Alternatively, borrowing costs can be reduced by a reduction in your overall mortgage amount.
  2. Raise additional funds. Release equity from your property to make home improvements, meet spending commitments or buy an investment property.
  3. Preserve liquidity. Maintain your investment strategy without selling any holdings.
  4.  Gain flexibility and control. Reduce or extend the length of your mortgage term.
  5. Consolidate your banking relationships. Reduce your number of banking relationships by consolidating loans under one provider.

Is it worth it?

Refinancing your mortgage could make good financial sense but it’s important to consider all the potential costs and fees:

  • What is the total cost of the new mortgage?
  • How much interest remains due on your current mortgage?
  • How much of your existing arrangement fee remains unused?
  • Are there any early repayment charges on your existing mortgage?
  • How do the terms and conditions vary between your existing and new mortgages?

The above considerations are not exhaustive.

For example, consider a family with a five-year interest-only mortgage of £5 million on a variable rate of LIBOR + 2.8% with two years remaining. Another mortgage provider has proposed terms on a five-year mortgage for the same amount, but at a lower interest rate of LIBOR + 1.65%.

Representative example: A standard interest-only mortgage on an owner-occupied property of £5,000,000 payable over five years, at a variable interest rate. For illustrative purposes, this is stated as 1.75%, which is 1.65% above one-month sterling LIBOR considered at 0.1%, which would require 60 payments of £7,291.67, totalling £437,500.00. These amounts are illustrative and may vary, for example if the interest rate changes. The total amount payable would be £5,474,500.20 including an arrangement fee of £25,000, a valuation fee of £6,600 and legal fees of £5,400. The overall cost for comparison is 1.92% APRC representative. In calculating the APRC we have assumed the interest rate does not vary; the actual APRC could be different if the interest rate changes.

Fixing your rate:

The same types of questions need to be asked if you are looking to lock in historically low rates. If you prefer rate certainty and know you will have this debt outstanding for at least the duration of the mortgage, then a fixed rate may be an option.

For example, consider a venture capitalist with a 10-year interest-only mortgage of €13 million on a variable rate of EURIBOR + 1.93% with eight years and three months remaining. Another mortgage provider has proposed terms on an eight-year mortgage for the same amount, but at a lower interest rate of EURIBOR + 1.00%. The client was interested to fix their rate, which we were able to arrange at 1.27%.

Representative example: A standard interest-only mortgage on an owner-occupied property of €13,000,000 payable over eight years and three months at a fixed rate. For illustrative purposes, this is stated as 1.27%, and would require 99 payments of €13,758.33, totalling €1,362,075. The total amount payable would be €14,448,674.67, including an arrangement fee of €25,000, a valuation fee of €6,600 and legal fees of €55,000.

In order to comply with the provisions of Articles L.314-1 et seq. of the French Code de la consommation and Article L.313-4 of the French Code monétaire et financier, it is not possible to calculate the effective global rate (taux effectif global) (the “TEG”)  for the duration of the Facility and acknowledge that the example of the TEG calculated is based on assumptions as to the period rate (taux de période) and the period term (durée de période) and on the assumption that the interest rate and all other fees, costs or expenses payable will be maintained at their original level. 

However, it is stated, for information purposes only, that for:

the Facility denominated in EUR, on the basis of a 1 (one) month EURIBOR of 0.00% on 23 March 2020 and a margin of 1.27% per annum, the TEG would be 1.354% on the basis of a year of 365 days, or as the case may be, 366 days for full use of the Facility amounting to €13,000,0000 (thirteen million EUR) in principal; then a period rate (taux de période) equal to 0.113% (the period term (durée de période) being of 1 (one) month);*

*The TEG provided here is illustrative and subject to change as an element of information is missing at the time of preparing this illustration: Insurance Premium

The JP Morgan team are here to help you find that silver lining in these volatile times, whether that is through the assets you are investing in or your financings.  Stay safe and if you would like to find out more about any of the information discussed in the above article, or about the mortgages available from J.P. Morgan Private Bank, please contact your J.P. Morgan Advisor.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
FLUCTUATIONS IN THE EXCHANGE RATE COULD AFFECT THE AMOUNT YOU PAY.