In 2016, there were just 7,700 repossessions, according to the Council of Mortgage Lenders – the lowest number since 1982. That’s despite the real challenges the white paper outlines, such as the doubling of the ratio of average house prices to earnings in under 20 years, and the lowest rates of house-building in Europe.
A big part of this paradox is explained by interest rates. In 1982, the base rate started the year at over 14%. Today, buyers can actually borrow on a five-year fixed rate term with Tesco Bank at 1.78%.
That sort of deal alone explains why longer-term fixed rates are increasingly important for brokers. There’s a range of tremendously attractive five and even 10-year products out there to appeal to clients.
Lower for longer
Shorter-term, particular two-year, fixed rates remain cheaper, but the margin is shrinking. And, with swap rates rising, demand for longer-terms to lock in those low rates is only going to grow.
Lenders, too, remain keen to offer competitive products in this space as they fight for market share. Rates might not be able to fall any further and remain profitable, but competition could still see new products launched and deals extended to higher loan to values.
With more lenders now paying procuration fees on product transfers, there’s also an element of self-interest in tying borrowers to longer terms.
Demand from borrowers remains high, then, and competition is ensuring good supply – at least for now. That’s reason enough to keep a close eye on this part of the market.
There’s another, too, though: longer-term fixed rates are among the best ways to ensure those repossession numbers stay low.
Despite affordability tests, many borrowers would still struggle if interest rates rose significantly. Long-term fixed rates help guard against that.
Until we can sort out some of the challenges the white paper outlined, they remain among the best tools brokers have to help clients face the future with confidence.
The advice for many has to be: Go long.