This week Kensington Mortgages became the latest lender to move into the long-term fixed space, with the release of a 40-year fixed rate in partnership with insurer Rothesay. It follows Habito’s launch of its Habito One proposition this year, with Perenna set to launch next year.
While brokers have suggested that the flexibility of the products will be fundamental to their appeal, others have noted that it will also be a question of how well advisers and borrowers alike understand the deals in question, as well as how open both parties are to moving away from a “transactional” relationship.
Tired of remortgaging
Habito launched its Habito One product back in March, which provides borrowers with a fixed rate period of up to 40 years. Crucially, there are no exit fees, meaning borrowers can overpay or leave at any time without penalty.
Habito noted that often borrowers have little understanding of what early repayment charges are, nor how expensive they can be, so they are not always clear on the benefits of not having to pay them.
Alan Fitzpatrick, vice president of lending operations at Habito, said that the One product had been launched based on feedback from borrowers who were tired of having to switch deals every couple of years, and wanted more certainty about their future.
Habito said that it had received strong positive feedback since it launched the product, with borrowers often complementing the firm on how quickly their cases were handled, which it argued would add to the appeal for brokers.
It has partnered with Legal & General (L&G) Mortgage Club and Dynamo to extend distribution of the One product.
A question of education
Kevin Roberts, director of L&G Mortgage Club, admitted that with such fierce competition among lenders offering shorter fixed rates, the value they offer continues to win over borrowers.
“The price difference between the likes of a two-year and a ten-year mortgage would need to narrow significantly for them to become more mainstream,” he continued. “They will almost certainly be attractive to those wanting more long-term repayment certainty, but others may need more convincing. I sense there is more work to be done here from the lenders of these mortgages to help educate.”
It’s not just borrowers who may need educating on this front, but brokers too, according to Colin Bell, co-founder and chief operating officer of Perenna.
He noted that while the conversations his firm was having with brokers were positive, there was some “re-education needed to help them understand the product details and also the long-term earnings model”.
Bell argued that the success of long-term fixed rates relies on a move away from the “current transactional relationship” between brokers and their clients, so that it is no longer centred around a rate ending.
He continued: “At Perenna, we plan to pay advisers both upfront and then throughout the life of the product following an initial period. This offers advisers the benefits of consistent income, and incentivises them to find a mortgage which is good for their clients over the long-term, in return they will undertake an annual review.
“We can see the success that this ‘subscription’ model has brought to businesses like Spotify and Netflix and we hope advisers too will begin to benefit significantly, and the benefits to customers of a long-term relationship with stability are equally significant.”
Borrowers need a way out
Rachel Lummis, founder of Xpress Mortgages, said that she could count on one hand the number of clients who have opted for a longer term than five years for a fixed rate, and warned that with any long-term deal the potential exit fees will be key.
She continued: “These long-term products will only suit some clients if there is an option to redeem the mortgage far earlier than the whole fixed rate term. Longer term products may be the next hot thing, but let’s look at the big picture first. The devil is in the details.”
David Hollingworth, associate director of communications at L&C, noted that long-term fixed rates have been talked up in the past but have failed to make an impression, in part due to the way that they have tied borrowers in, though he noted that lenders are now recognising the issue and building more flexibility into these products.
He continued: “Bringing enhanced affordability into the equation will also be interesting in how this sector develops. Being able to offer flexibility to those that could demonstrate improved affordability due to the ongoing stability of payment should appeal to first-time buyers that may not otherwise have been an obvious candidate for a long-term deal.”
However, Hollingworth emphasised that these borrowers will need advisers to help guide them around the features and potential exit fees, rather than simply be drawn by the higher borrowing amounts.