Much has been written about the impact of falling mortgage rates from a consumer’s point of view. This changed environment also brings on new challenges for the advisory community.
The reality is many brokers are nothing of the sort. They perform an execution only service, putting clients’ details into a computer system and providing an answer. The true role of the adviser is to obtain the best long-term financial solution for their clients needs. For most clients this is probably their largest single financial transaction. Today’s interest rate environment means this role takes on a new perspective.
Most clients go through the typical life cycle of increasing borrowing until their early 40s. They start repaying debt and become net savers. Prima-facie the reduction in interest rates is nothing but opportunity ‘ in reality it may be a massive threat to people’s lifecycles. The increasing age of the population combined with dramatically lower current investment returns means there is a pressing need to start saving more and earlier, shifting the balance of the current cycle. To use the Chancellor’s words, fiscal prudency in the early borrowing years of your life has never been more vital. Keynotes from the adviser’s perspective ensure their client does not over-borrow or fritter away the mortgage savings.
There is evidence in the current remortgage boom that consumers are taking the view they can increase their borrowings cost effectively without an eye to the absolute repayment of their loan. With a potential recession looming this is a Doomsday scenario. Even if an adviser does not want to believe it is not in their best interest to restrict the amount a client wishes to borrow, there is the real threat of a mis-selling scandal appearing in future years where the regulators believe an adviser should have advised their clients not to increase their mortgage.
Over the past 20 years, the average mortgage rate has been 11%. The repayments required on a 25-year loan at 11% if maintained today would repay the loan in just over 11 years. This more than halves the loan period and the total cost of the loan. Every remortgage client should, as a matter of best advice, be asked whether they wish to sustain their payments at a higher level in order to accelerate the repayment of debt. Since these savings are all net taxed income, the total life style investment return is accelerated and customers will be able to save earlier for their retirement and for other needs. Encouraging people to be profligate is not good advice.