The recent Brexit vote pushed down mortgage interest rates to new lows, resulting in an additional 1.2 million U.S. homeowners falling into the “refinanceable population” – homeowners who would benefit from refinancing their mortgages – according to Black Knight Financial Services’ Mortgage Monitor report.
That additional 1.2 million brought the total number of borrowers who would benefit from refinancing to about 8.7 million – the highest level in at least 10 years, Black Knight says.
However, rising home prices continue to offset the trend. As home prices rise, the amount of savings a homeowner realizes through refinancing is diminished. Should mortgage interest rates rise again – by as little as 1% – it could literally blow the doors off affordability, the firm says.
“The reality is that, post-Brexit, mortgage interest rates declined by about 15 basis points – not significant in the grand scheme of things,” says Ben Graboske, executive vice president of data and analytics for Black Knight, in a release. “But for 2.8 million borrowers with current rates right at 4.25 percent, this modest decline was enough to put them 75 basis points above today’s prevailing rate – the point at which we consider a borrower to have incentive to refinance.
“Of these, 1.2 million also meet broad-based eligibility criteria – loan-to-value ratios of 80 percent or less, credit scores of 720 or higher and are current on their mortgage payments – bringing the total refinanceable population to 8.7 million, the highest level we’ve seen since late 2012,” Graboske adds. “However, unlike the 66 percent of borrowers Black Knight identified a few months ago – who could have both likely qualified for and had incentive to refinance in the spring of 2015 but for whatever reason didn’t do so – the vast majority of these new candidates did not have such incentive last year. This has produced a nearly 50 percent increase in the number of borrowers with newfound incentive to refinance, which may well be creating a more pronounced impact on refinance applications and originations as these borrowers rush to take advantage.”
After the U.K. voted to leave the European Union on June 23, increased investor interest in U.S. Treasury Bonds again drove down mortgage interest rates. In light of this development, Black Knight analyzed the effect that new multiyear lows in rates are having on the population of 30-year mortgage holders who could both likely qualify for, and benefit from, refinancing.
Graboske points out that if mortgage interest rates had not fallen 55 basis points during the first six months of this year, rising home prices would have resulted in a severe erosion of affordability.
“All else being equal, the monthly mortgage payment on the average-priced home should be approximately $63 less per month than it was at the end of 2015,” he says. “The post-Brexit decline alone would have decreased that payment by about $15 per month. However, as home values continue to appreciate – at a 5.4 percent annual rate, according to the most recent Black Knight Home Price Index report – the bulk of mortgage savings are being offset by rising prices.
“Purchasing a median-priced home today requires roughly 21 percent of the median household income; much less than at the height of the bubble and below the 2000-2002 average of 26 percent,” he adds. “What we need to keep an eye on is what would happen if and when interest rates begin to rise again, especially if sustained low rates continue to fuel home price appreciation as they have. Even if prices stay flat – unlikely as that is – a one percent rate increase would push affordability to 24 percent, while a two percent rate increase would put affordability well above the 2000-2002 average. The question becomes, what is a sustainable ratio in a market where qualified mortgage lending is the norm and student loan and other non-mortgage-related debt is on the rise?”