A fluid mortgage market means that long-term deals are unlikely to jump in popularity soon, especially in this era of economic uncertainty
The debate around the benefits (or otherwise) of longer-term fixed rates is one that raises its head regularly.
Ever since then-chancellor Gordon Brown decided he would be the man to end “boom and bust,” the market has been asked to justify why more borrowers do not take out long-term fixed rates as they do in other countries.
You will no doubt remember economist David Miles’ review into this very topic, which essentially concluded very few borrowers want them, so advisers do not recommend them, therefore very few lenders offer them. Sounds simple when you put it like that.
In a way, the still-small take-up for 10/15/25-year mortgages shows how diverse the market is – those countries where long-term fixed rates are the norm tend to offer long-term fixed rates and very little else. In such a situation, it is perhaps no wonder borrowers go for them in big numbers. Here, however, we have a much more fluid mortgage market and one in which the longer-term fixed rate only works for that small number of people who might know their own situation in 10, 15 or 25 years’ time. Good luck to them, but I feel many more borrowers will want the flexibility of a shorter term, especially when those longer fixes tend to come with some rather steep early repayment charges.
I appreciate this is something of a quandary for lenders. Recent research from the Mortgage Advice Bureau suggests over a third of homeowners would consider fixing for 10 years – that is perhaps until they see the higher rate and realise they will be paying a significant ERC in order to extricate themselves from the deal.
In other words, we want long-term fixes but we want borrowers to be able to get out of them should the need arise, which effectively means turning a longer-term fix into a shorter-term fix at a higher rate – the result being that advisers will recommend clients go for the cheaper alternative. With Brexit and more economic uncertainty on the horizon, I can definitely see the value of three- to five-year fixes while we wait to see what happens.
But as a nation of borrowers, I cannot see us being too enamoured by longer-term fixes unless that is all lenders are willing to serve up.
Bob Hunt is chief executive of Paradigm Mortgage Services