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Is there consumer appetite for long-term fixed rate mortgage products?

Our experts are divided this week, as one believes clients want and are well served by such deals, while the other believes they are unworkable

Mike Lazenby: Whitehall thinks long-term fixed rate deals are a good idea, some financial institutions already provide them and thousands of borrowers have opted for them. Therefore, the answer must be yes.

Long-term deals won’t suit everyone but they will suit more clients than brokers would have you believe. Brokers are driven by commission so it’s not in their interests to sell 25-year products. Two or three-year deals guarantee them churn opportunities that 25-year products don’t.

Despite the principle of giving best advice, the reality is that the majority of mortgages sold by brokers are not necessarily the best deals.

If customers believe that rates are going up, longer-term fixed rate deals lock them in at lower rates than may otherwise be available.

Anyone on limited or fixed incomes should also consider long-term deals to fix their outgoings, avoiding the rate shock that can accompany short-term products.

From 1989 to 1994, SVR mortgage deals averaged over 11%. Between 1995 and 2000 this dropped to around 7.5% and since 2000 the figure has fallen to around 6%.

Although rates have dropped over the past 20 years, long-term deals below 6% are likely to be good value, especially given the high fees that most lenders charge on remortgages that can wipe out their benefits.

The bottom line for borrowers is that they should choose mortgage products that suit their circumstances not brokers’ needs.

Removing the uncertainty of interest rate changes and selecting a product that allows overpayments without penalty but with flexibility and portability is ideal. And if there is less remortgaging costs will fall and lenders will be able to provide better deals.

Danny Lovey: Chancellor Alistair Darling’s fixation with long- term fixed rate deals seems to be driven by the belief that consumers, lenders and brokers are ignorant and that nanny knows best.

Nanny thinks there’s more security and flexibility in 25-year fixed rate deals. Those of us in the mortgage business who deal with clients all the time and operate in the real world have a different experience.

Regrettably, relationships change and divorce rates are high. Changes in working practices and job insecurity are part and parcel of today’s world.

Borrowers generally don’t want to be tied in without the flexibility of being able to change their minds on products. They don’t want to rely on portability. They want a whole market of lenders to choose from and don’t like early repayment charges.

Brokers recommend products that suit customers’ needs and circumstances after undertaking full fact-finds. Recommending expensive 25-year products that may incur unnecessary ERCs could leave brokers facing mis-selling com- plaints in the future.

In his Budget speech, Darling made the following notable remark.

He said: “I also want more people to have the choice of a long-term fixed mortgage. These protect borrowers from risks and allow them the flexibility to move and to get a new mortgage if rates go down.”

It seems that Darling wants lenders to take the risks of exposure on long-term deals while giving borrowers the option to redeem them whenever they want. But until someone can invent a keenly priced long-term fixed rate with no excessive arrangement fees and ERCs that lenders are able to manage prudently, Darling can dream on.

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