The mortgage market has been going through a gradual change as it adjusts to higher-for-longer interest rates. With this shift, a rising tide of higher mortgage rates has reshaped the landscape and, notably, is creating a shrinking pool of homeowners with mortgage rates below 5%, according to the July ICE Mortgage Monitor Report.
That means just 76% of homeowners have mortgages with sub-5% rates, compared to a significantly larger share of 90% just two years ago. Since 2022, 4 million mortgage borrowers have originated home loans with rates above 6.5%, with two million of these loans at rates exceeding 7%, ICE found.
Many economists have sought to predict when the so-called “golden handcuffs” of hyper-low interest rates will break, as many homeowners have been hesitant to list their properties and take on a much higher mortgage rate. This latest data shows that the pool of people with those historically low rates is shrinking, albeit slower than some predicted.
Also, if rates were to retreat at this point, this pool of mortgage borrowers might be in a prime position to refinance their higher-rate mortgages into something with minimal additional savings from slightly lower rates, said Andy Walden, ICE’s vice president of research and analysis.
“This has been a slow-moving change, as borrowers with lower rates have sold their homes or, to a smaller degree, refinanced to withdraw equity,” Walden said in a statement.
He continued: “The entire market is acutely aware of how elevated rates have been constraining origination volumes. But seen from another angle, the same dynamic is also serving to gradually enlarge the population of folks with high-rate mortgages, who are actively waiting for the moment a refinance makes sense. This would benefit both a growing number of homeowners and lenders.”
The refi opportunity
Refinance volume has plummeted since 2022 as interest rates crept up, remaining at a fraction of their historical levels. With no incentive for payment or interest savings, few homeowners could benefit from trading in an ultra-low mortgage rate for today’s higher rates unless they were tapping equity.
Still, refinance activity is happening—even in unexpected sectors. For instance, VA loans, which have more streamlined refinance options than conventional programs, have seen refi share of activity surge from under 10% in 2023 to more than 30% in recent weeks, ICE found.
These refis have helped some VA borrowers reduce their interest rates by more than a full percentage point, leading to $230 in monthly average savings in April, ICE reported.
VA refi activity has, in part, boosted refinance retention to its highest level in 18 months in Q1, ICE found. What’s driving the increase? A tripling of rate-and-term loan retention—from 15% in Q4 2023 to 46% in Q1 2024—among VA and FHA refi borrowers.
In separate research, the ICE Borrower Insights Survey confirms that borrowers’ top priority is to find the lender offering the lowest rate possible. However, most borrowers (84%) tend not to shop around for a mortgage, consulting only one or two lenders before getting a mortgage, the survey found.
