At the recent Manchester Mortgage Business Expo, housing economist John Wriglesworth accused brokers who recommended short-term fixed rate deals to their clients of being ‘a bunch of mis-sellers’.
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His view was that interest rates could rise leaving some clients struggling to manage payments on the standard variable rate after the initial deal was up – and finding they had limited options to move.
He added too many brokers were pandering to customers who ‘cannot see past the end of their noses and will always go for the cheapest fix’.
This was inflammatory talk, but it is also healthy that we’re an industry prepared to air views openly. But, is he right to blame brokers for the popularity of short fixed rate deals? I don’t think so.
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They are certainly not the only party involved in the process – lenders are creating these products and customers are buying them. They remain best sellers because for the majority, keen pricing even if for a limited time, is everything. Taking a pop at intermediaries in isolation is unfair.
Lenders must make sure they make all terms clear as to what happens when the fixed rate period is over – and in particular if it is a non-advised sale. And, provided they understand what they are buying, then borrowers must ensure they are prepared as far as possible for potential rises.
Looking for the best option
There are thousands of mortgages out there and two-year fixed rate deals are only one option.
Many brokers are, I believe, looking to provide their clients with the best possible solution to fit their circumstances and so for many, lower initial rates may be the only way someone can buy for the first time or move and deal with associated costs.
As for suggesting brokers’ customers are naive, those buying direct rather from an intermediary are more likely to be less informed. Most brokers – and more than ever in the regulated market – spend time and effort explaining the ins and outs of a mortgage they recommend.
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The vast majority of brokers want to secure the loyalty of their clients – recommendation is after all the cheapest way to win more business. But, if their customers are saying they can only afford a particular product such as a cheap short-term fixed rate and are aware of the pitfalls, the broker has few options.
Providing more products
That is not to say we, as lenders, should not be providing more options. Earlier this year, Nationwide launched a 25-year fixed rate mortgage, which attracted plenty of attention.
But this was only made available to a limited amount of customers – numbering a few hundred – for a short offer period. We may see more lenders offer similar deals, and a couple of the smaller building societies are also in this market, but to date, they have been a rarity. What is more, demand has not been strong.
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Such products are not going to suit everyone. They will be charged at a higher rate than short-term mortgages and may well have less flexibility – for example, the Nationwide deal charged an early redemption fee if the loan was moved during the first 10 years. Portability matters and we also have a strong and competitive remortgaging market in the UK.
Of course, brokers like the rest of us, cannot predict what is going to happen to interest rates or inflation. But, while reminding clients that further rises are likely, many buyers will not want to put their lives on hold. And, indeed, in the UK, rates remain relatively low, while some experts claim we are close to the peak. There remains a shortage of property in parts of the UK and although the market may have slowed, plenty of pundits say further rises are likely.
No imminent crisis
There is no doubt that some people are close to their limits in terms of affordability with their current mortgage repayments and others will become so once their current deal ends. But, there is no imminent crisis – or suggestion that demand for short-term fixed rate products is going to diminish. There needs to be choice and there are also some good tracker products available, although these do not offer price certainty.
In fact, it was only a few months ago that lenders were being criticised for pulling some of the fixed rate products as a result of anticipated interest rate rises.
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Where a short-term fixed rate has been taken out, I do not see a host of these customers revisiting their brokers with complaints or claims for mis-selling later materialising. All the evidence suggests that brokers are doing their best to find the most suitable products depending on their customers’ individual circumstances.
