An industry commentator claimed recently that if mortgage intermediaries do not sell long-term deals, they are mis-selling to their client, and that brokers should focus on selling predominantly long-term fixes.
John Wriglesworth, managing director of the Wriglesworth Consultancy, made his claims in Mortgage Introducer two weeks ago, and said that intermediaries should focus on selling long-term fixes to clients.
However, his opinion was met with scepticism, not least from Danny Lovey, proprietor of The Mortgage Practitioner, who said: “On the contrary, I believe that you are likely to be mis-selling if you sell something that is unsuitable. All sorts of things can happen, especially if you are dealing with young people who are applying for a mortgage as their circumstances can change, and if they are in a long-term deal and need to get out of it, they will face early redemption charges. You should sell what is suitable for clients’ needs and give them best advice.”
Looking for certainty
Despite Lovey’s disagreement with Wriglesworth’s statement, statistics from Abbey this week showed that borrowers are choosing longer term fixes rather than short-term deals, with the majority opting for five years, rather than two. One in three would also fix for more than five years with the need for ‘certainty’ given as a reason.
With widespread predictions that interest rates will drop next year, this research has come as a surprise to some, as it reported that 14 per cent of home owners would choose to fix for five years, 6 per cent would fix for 10 years and 9 per cent would choose to fix for 15 years.
The demand for five-year fixed rates also outstripped applications for two-year fixes. In the Summer, 40 per cent of respondents said that they would opt for a two-year fix; however, that number has now dwindled to just 12 per cent.
Buyer prerogative
The general consensus for choosing fixed rates comes from the option of ‘wanting to know what the monthly outgoing is’ – a common prerogative of the first-time buyer. There was also a common belief that interest rates will increase in the next two years, raising the question of whether consumers are correctly educated on mortgage products and financial matters, or whether this was just a general assumption on the part of the respondents.
Paul Holden, sales director at Mortgage Stream, claimed that there was popularity for longer term fixes among those borrowers who are planning for the future, particularly those who are planning for a family or for school fees in the long term.
He explained: “The trend for long-term fixes has certainly grown in popularity recently and this is down to uncertainty in the market. Factors such as the credit crunch, fears over the housing market and interest rates have meant that more home owners want certainty when arranging their mortgage and not to suffer from dreaded payment shock when looking to remortgage.
“Even though it is predicted that interest rates may decrease in the near future, these fears do have a tendency to stick in the minds of borrowers and many want long-term stability. Taking out a longer term fixed rate may mean paying a little bit more every month compared to a shorter term rate but many home owners are happy to pay for this if it means some peace of mind.”
Lack of understanding
Another reason given by 8 per cent of respondents was that they don’t understand tracker mortgages, and that was why they would choose a fixed rate in the first place.
Nici Audhlam-Gardiner, head of mortgages at Abbey, claimed that taking a fixed rate deal was the best option for borrowers initially and essentially that the mortgage is suitable for their needs.
Audhlam-Gardiner said: “For most of us, our mortgage is the biggest financial commitment we make so it’s understandable that we want to know just how much we’re going to have to fork out each month. You never know what’s going to happen in the future, but at least if you’ve committed to a long-term fixed deal, you know where you are going to stand with your repayments. Borrowers need to be sure, however, that the deal they take out is right for them and that they understand the different types of mortgages available before signing up to anything.”
Ultimately, the main factor of selling mortgages is to ensure that the customer is sold the right product, which is suitable for their needs. Whether this is a long or short-term fix, or a tracker or variable rate, it is about correct judgement. Whether the decision to fix for the long-term continues over the next 12 months is yet to be determined, but financial activity will enable that to be determined.
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