It’s tough to justify 10-year fixes

Until lenders offer get out clauses so clients can switch out of 10-year fixed mortgages, longer term deals will remain a tough sell in terms of best advice, says Sally Laker

A couple of decades ago I would have given my right arm to have been able to fix my mortgage at 8%, let alone 5%. If it had been a 10-year deal even better. Why? Because interest rates were at 14%.

Luckily Bank of Scotland came to the rescue with what was called a stabiliser mortgage and this helped many a borrower survive. With this deal, the client agreed with the lender what rate they would pay. If interest rates went down they owed less and if they went up they owed more. An adjustment was then made to the loan after three years.

So what has all this got to do with fixed rates in today’s marketplace? Well, it’s a sign of the times. As I have mentioned, back in the late 1980s we would have done anything for a fixed rate and 8% would have been a steal but now things have changed so much that even a 10-year fixed rate at 4.99% will not necessarily fly out the door.

It seems crazy but we have become a nation of short-term fixers. We want two or three-year deals because we are ever optimistic that after two or three years the rates will be even lower. In reality this is unlikely to happen nowadays, but there will be a rate there or thereabouts.

So why not fix for longer and save switching every two years in hope of a better deal? In the case of best advice, it is a tough call to recommend a 10-year deal and effectively be sure that fix will be good for 10 years as well as proving that the client wouldn’t be better off checking and switching every two years. Who can predict for certain that interest rates won’t change much in 10 years, up or down?

Unless lenders can offer the equivalent of break clauses or get out clauses that allow borrowers to switch out of their fixes to other products during that 10-year period, longer term deals will be difficult to sell.

Nobody will want to pay hefty redemption penalties to switch even if it is to a more attractive product. Again, it is possible that many won’t switch, but not having the option is a deterrent to even considering it.

We have become a nation of switchers. We switch credit cards, car insurance, house insurance – and now mortgages are seen as an extension of that.

This is all great news for brokers as it is their business to look after their clients and check their mortgages fit their requirements. And we know that those requirements can change in a two-year period – you only have to ask Tony Blair about that.