Long-term fixes, what borrowers do benefit?

“Advisers are going to have to consider very carefully those borrowers for whom such a recommendation will make sense, especially given all the alternatives available right now.”

First on a positive note – we’re all for true innovators and disruptors in the mortgage market.

Unfortunately the problem is that the above are rare to say the least, and the question should most probably be asked, what is true innovation? Does it even exist anymore?

Recalling Bob Young at Fleet Mortgages saying that most of what is described as ‘innovation’ in the mortgage market, is usually either cutting prices or essentially going up the risk curve. He argued that when most stakeholders ask for more ‘innovation’ they’re probably asking lenders to do one of those two things, and you’re not being innovative in doing either, however much you might think you are.

Baring that in mind, turning to the launch of Habito’s forty-year fixed-rate mortgages. In a way, Habito might say their job has been done with us writing about them in this article – perhaps that is the measure of what it wants to achieve with the launch of these products. Brand awareness is clearly an important part of its strategy and, let’s be fair, it’s produced some very strong results in that regard.

But sooner or later we are going to judge this product offering – and others that will undeniably follow in this space – on the very basics, and despite them not having ERCs or exit fees, are they adding a much-required mortgage option to borrowers?

Long-term fixed-rate mortgages will always provoke interest, not least because Governments tend to be strong advocates of them. And of course, there will be some borrowers for whom they are suitable, although you might argue whether long-term should actually mean more like 10 years, rather than 40.

But, there are still many obstacles to overcome. For instance, when this announcement was made, a former marketing director of a well-known lender pointed out that a former employer of his had launched something similar back in the mid-2000s – a 25-year fixed-rate product. It ended up with seven completions.

And that’s a significant issue for those offering long-term fixed-rate mortgages to overcome. Any adviser is going to have to consider very carefully those borrowers for whom such a recommendation will make sense, especially given the other alternatives available right now.

While there has not been a glut of products offered in the 90% LTV space, over the last few months in particular, their number has grown and you might well think that the introduction of more 95% LTV mortgages next month and beyond, will also give others confidence to offer more high LTV options.

For instance, if you’re a first-time buyer with a 10% deposit and want a fixed rate, you can currently get a two-year deal for not much over 3%. Five-year deals are not that much more expensive and given this is a relatively low interest rate environment, you have to think about the potential for a change in circumstances over such a period. You can guarantee a lot is going to change in 40 years.

Of course, interest rates are also going to change. With a current Bank Base Rate of 0.1%, that is inevitably going to rise at some point in the future, but currently the talk is of negative rates before that happens. Who can potentially say when we might see any notable rise in BBR, and given the competition in the lending sector, would we see a huge rise in mortgage rates when that happens anyway? We doubt it very much.

In essence, at current long-term fixed-rate pricing, borrowers would be mitigating against a risk that doesn’t really exist, certainly not within a two-, or perhaps even, five-year horizon.

So, the point, must surely remain – what borrowers benefit from long-term fixes? Those who can’t secure a mortgage based on the affordability criteria of those lenders offering 25-year mortgages? Those who maybe don’t have any Bank of Mum & Dad support? However, as mentioned, we are likely to see 5% deposit mortgages, albeit again we’re unsure about how expensive they will be.

Clearly, long-term fixes have a place in the market, and lenders are providing product choice by offering them. Well done to Habito for addressing the issue and providing product solutions for those who may well fit the bill.

It will still however require plenty of thought and research by the adviser in order to justify these recommendations, and perhaps more importantly, clients who have a very long-term view of their situation and circumstances, and are willing to pay for that certainty.