Fast-forward to 2023 and the introduction of Consumer Duty to justify actions and prioritise fairness and positive outcomes to mitigate foreseeable harm.
Elon Musk’s saying: “Some people don’t like change, but you need to embrace change if the alternative is disaster,” resonates deeply in this context. Consider a scenario where a client asks for a ‘cheap’ mortgage to provide a home for their family.
Advisers might recommend a short fixed-rate mortgage, like a two- or five-year fix, for its perceived stability and affordability. However, unforeseen events such as divorce, pandemics, rates shooting up or products being withdrawn dramatically alter someone’s ability to manage mortgage changes and may force them onto less favourable standard variable rates (SVRs.)
An alternative solution
This brings to light the importance of presenting flexible, long-term fixed-rate mortgages – for example, a 20- or 30-year fixed rate – to give borrowers a choice. They allow clients to control when they remortgage, based on improved circumstances or better rates.
They decide if or when is right for them. Bob Dylan captured this sentiment with: “There is nothing so stable as change.”
Long-term fixed rate products embody this stability through change, offering flexibility and security hand in hand.
For advisers, networks, and compliance functions, the ask is clear: discuss all options and allow informed choices. Undoubtedly borrowers will request the ‘cheapest’ mortgage, but the stakes of predicting the future incorrectly are high.
This demands a deep understanding of the borrower’s true needs, balancing initial costs against stability, long-term expenses, flexibility, and overall satisfaction, i.e., cheaper does not necessarily equal value for the customer.
Thinking of the future
Predicting interest rates is an uncertain endeavour.
Just as countries shield themselves from interest rate risks, individuals should also have protections in place. Advisers have a duty to present a range of options and enable a genuine discussion about risk appetites.
As Steve Jobs said: “A lot of times, people don’t know what they want until you show it to them.”
Borrowers won’t know about 30-40 year fixed rate mortgages with five-year early repayment charges (ERCs) unless you tell them.
Borrowers may also wonder why they had not been presented with them as an option, if in five years’ time they face a rate shock, or a lack of suitable products, that they could have been protected from.
The long-term fixed rate mortgage model still rewards advisers throughout the lifetime of the loan, if they continue to check it is still the right option for the client, and acting if it is not.
With no reversion rate, there is no need to stress about an interest rate risk, so many clients may be able to borrow more money safely, and with the reassurance their payment will never go up.
Advisers or their clients will never know what the future entails, but with a long-term fixed rate mortgage, they are granted stability and flexibility for potentially their most important financial commitment.
