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Fixed-for-term mortgages on the horizon for UK lenders and brokers – analysis

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  • 28/01/2020
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Fixed-for-term mortgages on the horizon for UK lenders and brokers – analysis
A number of UK mortgage lenders are believed to be developing fixed-for-term products which will take advantage of current low funding costs to offer fixed rates over 25 or 30 years.

 

The first fixed-for-term products could be launched during the second half of 2020 or early 2021.

Such mortgages are the norm in the US, have been established for hundreds of years in Denmark and are an accepted part of the mortgage market in Germany.

Lenders’ focus has shifted onto longer-term rates in the UK since the interest rate yield curve —  the difference between interest rates at three, five, ten and 30 years —  has narrowed sufficiently to make them affordable for borrowers.

“There are lenders working on this,” said Ray Boulger, senior mortgage technical manager at John Charcol (pictured).

“There are some potential new lenders and some existing lenders. With something this new and innovative, you’ll have a number of people looking at it. Some will go ahead and others won’t,” he said.

The potential for long-term fixed mortgages in the UK may also interest insurers with big annuity books that are looking for long-term assets.

“Those sort of lenders are already funding most of the long-term fixed rates in the lifetime mortgage market. They have experience of that market and it would certainly be natural for insurers who are already in that market – and maybe some who aren’t – to look at that as a way of diversifying,” Boulger said.

“It’s still early days. I don’t think we’ll see any mortgages in the first half of this year, but before the credit crunch we did have one lender offer a 30-year fixed rate mortgage,” he added.

 

Flexible ERCs a must

The make or break factor for such a product would be its level of flexibility with early repayment charges (ERCs).

Boulger noted that it was very important for the ERCs to be reasonable.

“For the borrower, a fixed long-term has the attraction that they can budget for the long-term, but most people are going to move house within 25 or 30 years,” he continued.

“The lender would make the mortgage portable so that it can be transferred to a new property, but the borrower will probably want to borrow more money at that stage, so there can be all sorts of issues as to whether they can stay with the lender.”

Three possible solutions were to have ERCs apply only for the first five or 10 years, to have them pegged at a sufficiently low rate that borrowers would accept them, or to have ERCs that do not apply in certain circumstances.  

Boulger added that fixed-for term products offered a low-risk route to market for lenders, which, when they can borrow money at very low interest rates as they can now, could then very likely re-lend without losing out even if borrowers redeem the mortgage early.

“That’s a big plus for lenders, which at the moment have to fight every two or five years to keep the business either with a decent product transfer or a remortgage,” he said.

 

An intermediated market

However, brokers have said previously they are unconvinced by the potential for fixed-for-term products, the market for which the Tories said they wanted to encourage in their General Election manifesto of November 2019.

Perenna, a would-be mortgage lender currently stepping through the process of becoming a bank, and whose business concept is based on fixed-for-term mortgages, outlined how it envisaged the market segment as intermediated.

“We see this as a distribution-led product, absolutely,” said Colin Bell, chief operating officer at Perenna Mortgages.

“When you change the mindset from short-term products to long-term products in our opinion it doesn’t remove the need for that borrower to be consulted and visited and spoken to on a regular basis. 

“If it’s a long-term contract, not dissimilar to a pension, you don’t just give them a pension and leave them to it. Circumstances change, people need more money, people move house, people want to extend their properties, there is good reason to be constantly talking to the borrower and reviewing their circumstances.

Bell continued: “We’ll have needs though the life of the mortgage to get information from the customers. We’re interested in what’s happening with that customer through the life of the mortgage. If it’s a long-term fixed, it’s important for the broker to continue servicing that customer and for the lender to get information on the borrower’s circumstances.

“If the broker sold that particular mortgage then we view that as being their role. And if they are doing this work on our behalf then, yes, we’d want to remunerate them. If we can remunerate them for that part of the process then obviously it works for both parties,” Bell said.

Perenna said the designs for how broker remuneration would work with a fixed-for-term product would be developed as part of the product creation process, which will come after the entity has completed its authorisation as a bank.

Bell added: “That would be new; it’s part of our process of how do we design the product, how do we cost those kind of things. How do we get approval for that kind of income structure?

“It’s early days, but that’s certainly our view. If a broker sells a long-term fixed rate mortgage they need to be engaged through the life of the product and they need to be appropriately incentivised to look after that customer and help us where we need help.”

 

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