Justine Tomlinson is Marketing Director at Mortgage Next
The mortgage industry is not a sector you would automatically link with fashion. However, it is not immune to its own fashion trends, with ‘in’ products becoming old-hat and falling by the wayside and old fashions being recycled once again to be the latest ‘must have’ deals.
Take long-term fixed rate mortgages for example. Do you remember the Miles Report published more than two years ago, which was a brave attempt to get us all to take long-term fixed rates? It had about as much impact on changing consumers’ borrowing behaviour, as Jade Goody had on philosophical thinking.
A firm favourite
Over the last few years, short-term fixed rates have remained a firm favourite with consumers despite the government’s attempt to encourage us to think long-term, and lenders have been only too happy to satisfy the demand. Short-term fixed rates do create a problem, however – churning. When borrowers come to the end of a fixed rate term, they are happy to switch lender to get a better deal elsewhere. To compound the problem, lenders dropped overhanging redemption penalties because of the adverse publicity generated in the media, which has made it even easier for borrowers to switch lenders.
Client retention is a big issue for lenders, who are desperate to find a solution to the problem. As with changing product fashions, we’ve also seen changing retention fashions: different types of retention penalties; different methods of paying procuration fees; new product development ideas; and heftier fees and charges. The truth is that none of these ideas have worked, because the financial incentive for borrowers to move mortgages has been just too great.
However, long-term fixed rates appear to be the latest weapon in the war to retain borrowers. With 10 and 15-year fixed rates being competitively priced, lenders can promote them as being a better bet for borrowers than going through the hassle and expense of remortgaging every couple of years.
Looking at the market
Northern Rock appears to be focusing its client retention strategy on long-term fixed rates. Its 10 and 15-year fixes, for example, are priced at 5.29 per cent up to 85 per cent loan-to-value (LTV) and 5.69 per cent up to 95 per cent LTV. They are fully flexible, borrowers can pay off lump sums and port the product if they move in the future. Most of the restrictions which put people off long-term fixes have been removed.
Northern Rock is not only paying higher procuration fees on these products but has also realised that a number of life companies have changed from two-year to four-year claw-back periods. Long-term fixes also make sense for intermediaries.
Another good example is the Stroud & Swindon, which has launched a 15-year fixed rate mortgage at 4.99 per cent. Borrowers can pay back up to 25 per cent of the loan without any penalty and the product is also fully portable. If they do redeem the loan they only incur a penalty during the first 10 years. This is a deal which is as competitively priced as many two and five-year fixed rates and yet provides financial certainty for a 15-year period.
If I were setting out on the housing ladder today, I think this type of mortgage would hold a lot of appeal for me. As Paul Chafer, sales director of Stroud & Swindon, said: “Rather than having the hassle, expense and lack of security of finding a new mortgage deal every two or three years, this gives borrowers the certainty of a great rate for 15 years.”
Broker reluctance
It is interesting that, in response to these type of deals, brokers still appear to be reluctant to recommend them. One intermediary said about long-term fixes: “I would find it difficult to recommend a long-term fixed product to a young couple because the market and their circumstances are likely to change over the period of the deal.” Isn’t that the very reason why long-term fixed rates are such good news for young homeowners?
It will be interesting to see the degree to which long-term fixed rates catch on. Will they become the next fashion in the mortgage industry? They might, if they satisfy the needs of enough people. It seems to me that borrowers are getting competitive rates, flexible products, long-term peace of mind and freedom from needing to reconsider their mortgage every couple of years. Brokers still get a procuration fee and don’t lose out on any related life policy fees being clawed-back and lenders get to retain their clients.
Let’s take another look at this possible new fashion in say five years time and see what’s happened.
What’s in a name?
On a slightly more frivolous subject, don’t you just wish the mortgage industry could agree on some standard terminology? A few years ago life was pretty simple. If someone referred to ‘vanilla’, ‘niche’ or ‘sub-prime’ mortgage, you knew precisely what they were going on about.
But recently, as lenders have pushed both up and down the credit curve, the fashions have changed and new terminology has crept in: ‘non-conforming’, ‘non-standard’, ‘mainstream’ and ‘prime niche’ – to name a few.
What do these terms really mean? Is it the product, the mortgage or the consumer who doesn’t conform? What do they not conform to? I thought that ‘non-conforming’ was an Americanism, referring to loans which did not conform to the requirements of Fannie Mae and Freddie Mac and could not therefore be securitised (but I could be wrong and, if I am, I’m sure someone will put me right). However, our industry is not structured in the same way in the UK, so why have we adopted American terminology?
I think it’s about time we found a new way to pigeon hole mortgage products. What, for example, do you call a self-employed borrower who needs to borrow less than 50 per cent on a £1 million overseas property?
Lucky, I guess.
