Such is the impact of speed in the modern mortgage market that it might be easy to view the phrase ‘long term’ as being old-fashioned. However like the mini skirt, the mullet, flares and skinny jeans, things seem to have a habit of reappearing and suddenly becoming ‘fashionable’.
The debate between the merits of short-term and long-term deals is an age old one. Indeed it has been three years since Professor Miles’ review of the mortgage market made a brave attempt to convert lenders into lending on and consumers into agreeing to longer term products.
get the daily news delivered to your inbox
Miles called for increased transparency and enhanced consumer advice. Specifically, he called for lenders to make all their deals available to both new and existing borrowers. This had the intention of leading to fairer pricing for more borrowers; however, some lenders were unable to continue with their current pricing strategies in this environment.
He hoped it would result in longer term fixed rates becoming more competitive which they certainly weren’t at the time of the report and that this would encourage an increased take up in such products. Although even at the time, despite industry backing, there were major doubts that take-up of such deals would rise substantially.
A firm favourite
But over the last few years, short-term fixed rates have remained a firm favourite with consumers despite the government’s attempt to encourage long-term thinking, and lenders have been only too happy to satisfy the demand.
Short-term fixed rates do however create the problem of churn. 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 have dropped overhanging redemption penalties because of the adverse publicity generated in the media, which has made it even easier for borrowers to switch between mortgage lenders.
register for the next forum
Rob Clifford, managing director at Mortgageforce, responds: “The Miles report was wrong to infer to government and the market that the industry was standing in the way of the demand for longer term fixed rates. The truth is that the majority of borrowers have for years rejected longer term fixed deals in favour of shorter periods.”
However Clifford sees the mentality changing in line with the recent interest rate rises and the increasingly bleak Bank of England Base Rate outlook.
“Psychologically, we Brits just didn’t like the idea of being committed for too long and have learned to shop around every few years for a keener deal. There is no doubt that this sentiment is changing though, in line with a bleaker interest rate outlook,” he adds
The issue of churn and short-term fixed rates was raised again at last month’s Manchester Mortgage Business Expo by housing economist, John Wriglesworth, who cited brokers advising on two-year deals as tantamount to ‘mis-selling’.
catch up on the industry buzz
Wriglesworth also hinted that too many brokers were pandering to customers who ‘cannot see past the end of their noses and will always go for the cheapest fix’.
Speaking in his regular Lender Viewpoint column in Mortgage Introducer, Paul Hunt, former head of marketing at Platform, said: “This was inflammatory talk, but it is also healthy that we’re an industry prepared to air views openly. However, is he right to blame brokers for the popularity of short fixed rate deals? I don’t think so.
“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.”
Hunt adds: “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. Provided they understand what they are buying, then borrowers must ensure they are prepared as far as possible for potential rises.”
Planning finances
With interest rates rising alongside personal debt it is inevitable that borrowers will seek to plan their finances better and for as long as possible. The maximum term for popular fixed rates has been five years for almost two decades and it is fair to assume that for those who have purchased, relocated or remortgaged in that time will still retain a mental approach that says five years is long enough to be tied to either one product or one lender. This mentality could mean that the barrier to longer term fixed rates remains, unless interest rates really do go back up to the 10-12 per cent levels experienced in the late 1980s and early 1990s.
register for 'adviser finder'
However as more people between the ages of 25-40 enter the home purchase market, the more positive their attitude may be to longer term rates. Attitudes may look at embracing 10 year deals first then maybe 15 years over the next decade. This is assuming that lenders can obtain the types of funding that can sustain this, which would seem to be a major challenge over the next five to 10 years given the anticipated levels of arrears and repossessions.
Clifford says: “Even those borrowers who are pre-disposed to grabbing the security of fixed monthly costs are nervous about deals which extend beyond 10 years. It just feels too long. I suspect that those who are borrowing up to their absolute limit and those for whom even a small interest rate rise would threaten affordability would more readily consider a 20 or 50-year fixed term. Advisers will want to carefully examine the arrangement fees and early repayment charges (ERCs) of any longer term fixed rates. After all, the changing personal and work circumstances of borrowers expose them to the risk of having to change direction and incur any exit penalties. The holy grail is a longer term fixed rate but which avoids punitive ERCs.”
Bill Warren, director of Complete Loan and Mortgage Services, says: “25-year fixed rates have been tried and withdrawn fairly quickly through lack of demand and while the future may see a home purchase market financed by more of a USA-style funding approach, the fundemental social and personal desire to own one’s own home and improve the size and content of that home as lives travel forwards will need to change dramatically. However if the current level of American-owned organisations acquiring lenders, or funding them and adding mortgage distribution through acquisition continues at the current pace, the face of home ownership and finance could easily go through a high speed revolution resulting in the 25 to 50-year fixed rates that some predict as the safe way forward for such substantial personal borrowing.”
Bad advice?
With an eye cast on the comments earlier regarding the potential ‘mis-selling’ of short term deals, Danny Lovey, who trades as the Mortgage Practitioner, dismisses the claims, and argues that the potential is greater for bad advice when recommending a long-term deal.
find the latest industry jobs
He says: “I am sure as a mortgage intermediary, I would lay myself wide open to giving ‘unsuitable advice’ in 99.99 out of 100 cases if I recommended a 25-year fixed rate product. Simply, 25 years is a long time and much can, and will, change. It is often difficult to see down the line past two years to five years, so why would you want to fix yourself into a deal when the average home owner moves about every six years?”
Lovey outlines the disadvantages of long term fixes – even if they are portable:
- The interest rate you choose, you may live to regret.
- You will normally be paying ERCs if you redeem within the term.
- By choosing a mortgage lender for this long-term fix, if you port it to another property, it may be that the new lender will not allow you to borrow all you need, so therefore you are in a difficult predicament or have to go to another lender and incur ERCs in doing so.
- As a consumer, you surrender many options and flexibility for going for a fixed rate over a long period, especially if you think you may move at some point.
Specific demand
The specific demand for 25-year fixed rate loans in the UK has, to date, been relatively low. This has been influenced principally by the terms and conditions associated with these products which have restricted customer choice. As a result, customers are still unwilling to commit to a long-term product as forecasting their future needs in 25 years time remains a major challenge for them.
However when thinking about advising and recommending long-term deals, 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 shows no sign of this low take up changing.
David Finlay, intermediary business director for Woolwich, believes that 10-year fixed rate deals have evolved significantly over the past few years and the market should take greater consideration of such products, alongside further developments such as lifetime tracker deals.
find out more about this weeks industry news
He says: “We have seen that long-term trackers have proved hugely popular with our customers over the last year, however, with future interest rate movements still uncertain we will 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.”
The term of a mortgage could also come in for a long-term rethink, it has been claimed.
The Mortgage Lender managing director, David Titmuss, claimed there was no reason why a mortgage should be restricted to 25 or 30 years, and that a 50-year loan was entirely possible and practical. The firm is currently in negotiations with a lender to develop a formulised 50-year mortgage, arguing that a combination of rising property prices and longer life expectancy were working against the traditional 25-year mortgage model.
Titmuss argued that there were already 50-year mortgages in place as people who purchased property when they were in their 20s would still be making payments 40 or 50 years later. He said the development would help people reduce their monthly repayments and help new buyers get on to the property ladder.
It will be interesting to see the degree to which longer term fixed rates catch on and indeed the prospect of 50-year terms. Will they become the next fashion statement in the mortgage industry? If they satisfy the needs of enough people they just might. Of course they will not suit everyone, but the beauty of the mortgage market is that it breeds choice and this choice along with maintaining high levels of advice will lead to fashion and financially savvy consumers getting the deals that suit them the best.
