The threat of another interest rate rise and a looming Brexit helped to propel remortgage levels to a nine-year high in the capital during Q2 2018, with figures from UK Finance showing 15,200 new homeowner remortgages completed in London during the quarter. The £4.84bn of remortgaging in the second quarter was 23.2% more than in the same period in 2017. In contrast, new home-mover mortgages fell by 8.1% during the same period when compared with Q2 2017, with 6,800 new mortgages and £2.77bn worth of lending.
There is no question the recent interest rate rise and forthcoming Brexit negotiations have played a part in the remortgage boom. Yet for some high net worth (HNW) clients, there is a more prevalent reason as to why they may be looking to remortgage rather than move once their mortgage deal has expired: stamp duty.
The impact the stamp duty escalations have had on prime property buyers in recent years should not be underestimated. The restructuring of the tax in 2014 amplified moving costs greatly for HNW clients by gradually increasing the tax levy the higher up the property ladder they climbed. While no tax is payable on the first £125,000 of a property’s value, the tax goes up the scale according to the table below, with clients paying a 10% levy on the portion of the property’s value between £925,001 and £1.5m, and 12% thereafter.
Amplifying this is the additional 3% stamp duty that was introduced in 2016 and applies to all second properties.
|Cumulative Brackets within Total Property Price
|Stamp Duty Rate within Bracket
|Additional Stamp Duty Rate for Second Properties
|£125k or less
3% of total property price
|£125k to £250k
|£250k to £925k
|£925k to £1.5m
|£1.5m or more
In real terms, this means a client looking to buy a £2.1m property faces a stamp duty bill of
£165,750; this compared with only £147,000 prior to the 2014 changes.
This grows further to £228,750 if the client is already a homeowner and buying a second
home – something that encapsulates many HNW clients.
Improve or move
Homeowners who have been dissuaded by the additional cost and decided to postpone their move are looking to make the most of their property. London has always been a hotbed for home renovation, and HNW clients play a large part in this.
According to the report ‘Home Improvers of Great Britain 2018’ from construction industry analysts Barbour ABI, London holds the top spot for home renovation applications, with 3.7 applications submitted per 100 homes in 2017.
This figure may be down slightly on the 3.8 applications per 100 homes in 2016, but analysts believe Londoners remain far more likely than anywhere else in Britain – around twice the national average – to improve than move, something that remortgaging may facilitate.
The impact the stamp duty escalations have had on prime property buyers in recent years should not be underestimated.
Taking a long-term perspective
Aside from renovating, there are plenty of other reasons to remortgage. The Bank of England may have increased the interest rate to 0.75%, but it is still at a historically low level. In line with this, we are witnessing increased demand for long-term fixed rates in both the residential and buy-to-let sectors, something demonstrated by the recent launch of our 10-year fixed rate mortgages in both of these markets.
Rate is not always king for HNW clients, however, and when it comes to their reasons for remortgaging, these may not always match those of mainstream clients. Due to the personal nature of private banking, in most cases there is not an issue with clients becoming stuck on their lender’s standard variable rate once their initial rate has ended, as can be the case in the mainstream market.
A holistic approach
So, why might a HNW client look to remortgage – aside from changing rate and locking in? A change in circumstances is a frequent reason for remortgaging. As the UK’s millionaire headcount continues to rise, there are clients who perhaps are entering the HNW world for the first time, or looking to remortgage from a retail bank to a private bank.
In some instances, and for the right client, remortgaging to a private bank might open the door to a higher loan-to-value (LTV) by including more of their income in the affordability assessment. For example, if a client’s income is formed of their basic salary, a bonus in a foreign currency and other assets such as stocks and shares, a retail bank may take 100% of their basic salary into consideration for affordability purposes but only factor in some of the client’s bonus or other assets.
A private bank, on the other hand, can take a holistic approach to the client’s finances and may be able to incorporate more of their bonus payments and other assets into the calculation, which may equate to a higher LTV or income multiple. This can be particularly useful for clients who are looking to release some capital from their property portfolios in order to invest in stocks and shares, or use as a deposit for another property.
The added cost of stamp duty means that some homeowners are also now making just one big move up the property ladder, whereas in the past they may have spread this out over two smaller moves. For those who still wish to make the move, however, it may be that a private bank is able to facilitate this by taking more of their income into consideration than perhaps a retail bank would.
So, while the stamp duty hikes may have caused some to think twice about moving home when their deal expires, the vibrant remortgage market that London is currently experiencing should help to compensate for this.
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