For many years, there has been a debate…
The following article has been supplied by Paul Brett, managing director, intermediaries at Landbay.
For many years, there has been a debate over whether longer-term fixed-rate mortgages would be a good option for more borrowers.
The basic argument is that, in fixing their rate over five or 10 years, borrowers would benefit from longer-term certainty over their monthly outgoings. And perhaps there is an even stronger case for long-term certainty over future mortgage payments when the loan underpins a business venture, as it does for the buy-to-let landlord.
In the lengthy period of low and stable interest rates since the 2008 financial crisis, the difference in costs between short- and longer-term mortgages narrowed, perhaps reinforcing the case for customers at least to consider a longer option. The Financial Conduct Authority’s affordability rules also persuaded some residential borrowers to opt for a five-year fixed term.
So far, however, only a small proportion of borrowers have been attracted to 10-year fixed rate mortgages. UK Finance data shows that currently they are taken up by only around 2% of residential borrowers, and that there has been no significant growth in their popularity over the last four years or so.
Perhaps there are good reasons for this. Borrowers may be put off by prepayment costs if they think their circumstances could change and they may want to pay off the loan early. They could also be worried about the portability of the mortgage should they wish to sell their current property and buy another. And over a long period, many borrowers have perhaps simply developed a strong appetite for shorter-term fixes, attracted by a keenly priced option for now but hoping for an even better bargain when they renew in two years’ time.
But do market conditions now present a clearer case for customers to re-consider fixing over a longer period? There has been a step change this year in Bank of England interest rate policy, with five increases in the last eight months. With inflationary pressures growing, the market will already have factored in the prospect of further increases in the future. But borrowers may still be able to get a more attractively priced long-term fix than might be available in a few months’ time.
For landlords, there is also the attraction of seeing rental income grow relative to borrowing costs that are fixed for a lengthy period. And if inflationary pressures spill over into the rental market, there may be more potential to see this kind of profit growth in the years ahead.
Meanwhile, there may be attractions for some landlords to fix costs over the longer term – where they can – to help them cope with other outgoings that may be due to rise steeply. Some landlords, particularly those with homes in multiple occupation, might have tenants whose utility bills are included in the rent. Those bills have already risen sharply and will do so again in the autumn.
After an extended period of stability, rates are now rising quickly – albeit from a low base. That at least reinforces the case for brokers and landlords to take a fresh look at the options for fixing borrowing costs over the longer term.
