Choice and flexibility when matched together are valuable tools in any intermediary’s armory. Generally speaking, lenders develop product ranges in direct response to customer and intermediary feedback, coupled with a firm look at profitability. In producing their ranges, there will always be the age-old debate over the merits of short-term over long-term deals, but the market for longer-term products has recently been boosted by a number of lender releasing new long-term deals.
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In March, Nationwide Building Society launched a 25-year fixed rate loan amid a battery of media hype and reaction, alongside a background of record demand for fixed rate deals. The Council of Mortgage Lenders (CML) statistics for February showed that 87 per cent of first-time buyers chose a fixed rate loan – up from the previous record of 84 per cent in January, and 82 per cent in the same month last year. February’s data also revealed that 70 per cent of home movers took out a fixed rate deal, compared to 67 per cent in the previous month. Overall, fixed rate loans accounted for 76 per cent of all loans for house purchase – returning to their highest ever level last achieved in November 2005 when they also reached 76 per cent.
Flexible and consumer centric
Returning to the development of the market, growth has been accelerated by a relatively stable interest rate outlook – although this has changed somewhat in the last year or so – and new product features that have made long-term products more flexible and consumer centric.
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The specific demand for 25-year fixed rate loans in the UK has, to date, been relatively low. This has been principally influenced by the terms and conditions associated with these products, which have restricted customer choice. As a result the customer has been unwilling to commit to a long-term product as forecasting their future needs in 25 years time is a challenge.
However when thinking about advising and recommending long-term deals, mortgage intermediaries would be wrong to only consider the 25-year fixed rate mortgages available. Historically, the volumes generated by these lengthy term products, despite the number of enhancements made by a number of lenders in this area, have been small and all the information available about consumer preference leads us to believe this low take-up will continue. Therefore, it is also worth considering 10-year fixed rates and lifetime tracker deals.
US market issues
A number of commentators may point to the US market as the birth-place for long-term fixed rates and raise the issue of the problems its non-conforming sector has developed, but we should remember there are fundamental differences between the markets. The US non-conforming market is a whole different article, but there are other factors to consider for the difficulties being faced across the pond, notably multiple interest rate rises, falling property prices and high loan-to-value products, which have all had a cumulative effect in that particular situation. Factors, in the whole, which are not being experienced currently by the UK market, although we wait to see where interest rates are heading in the short-term.
A significant sector of business
The structure of the UK housing and mortgage markets has driven product design and ultimately influenced customer choice and demand. During 2006 and now into 2007 long-term products have become a significant segment of the new business market.
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Transparency is the key element in both these kinds of product types and offer variations and flexibility in providing long-term security. Again I revert back to the word flexibility but this has been paramount in the success of the new breed of 10-year fixed rate deals through the development of flexible early repayment charges which balance the need for security of rate with an ability to overpay as customer lifestyle change occurs. The lifetime tracker also offers ultimate flexibility, especially if wider financial products such as current and savings accounts can be linked and offset.
We have seen that long-term trackers have proved hugely popular over the last year, however, with future interest rate movements still uncertain we will to continue to offer long-term fixed rates to allow customers to take any uncertainty out of their mortgage borrowings. With the development of portability customers are now free to transfer products as they move property and a long-term deal creates stability in an uncertain world.
These products will not suit everyone but the more choice an intermediary can draw from, via the raft of products they can offer, the greater the chance that the client will be provided with the right deal for them.
