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Long-term fixed rates will become ‘key battleground’ for lenders ‒ analysis

  • 04/02/2022
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Long-term fixed rates will become ‘key battleground’ for lenders ‒ analysis
Brokers are expecting to see an uptick in interest for long-term fixed rates of 10 years or more as borrowers search for security in light of rate rises and increasing cost of living, but there are concerns around lack of flexibility.


According to the latest data from Moneyfacts, in the residential market there are 172 10-year fixed rates, six deals fixed for 15 years, five deals fixed for 20 years and 181 fixed for term deals available.

This compares to a similar period last year, where there were 127 ten-year fixed rate deals, seven deals fixed for 15 years and four deals fixed for 20 years.

More lenders have entered into the market, with Habito releasing a 40-year fixed rate last year, and Kensington partnering with Rothesay for a long-term fixed rate mortgage.

Perenna is also aiming at launching this year, bringing 30-year fixed rate mortgages to the UK, which will be available to first-time buyers, those with a five per cent deposit, remortgagors and homemovers.


Lender overview

Kensington’s chief commercial officer Vicki Harris said the lender had seen a “significant amount of interest” since it launched its fixed for term suite of products.

She said: “In the current rate-rise, and inflationary, environment we do anticipate more borrowers opting for long-term fixed rates. The rise in the cost of living and hurdles such as affordability faced by first time buyers, especially with the tapering of Help to Buy in 2023, will also magnify the appeal of these products.”

She added that it also expected more lenders to enter the market with long-term fixed rates.

Harris said: “This increased competition would bring greater focus to the benefits of a long-term fix for customers, including helping initial affordability and providing repayment certainty.”

Alan Fitzpatrick, vice president of lending operations at Habito said it had thousands of people approach the firm for both its standard and enhanced affordability Habito One product, adding that it had had one of the busiest weeks for interest this year already.

He noted that this came direct from consumers as well as from its panel of external brokers, and its average customer had accessed a term of 25 years and 75 per cent loan to value.

Fitzpatrick said the product had very “broad appeal”, for instance, the unlimited overpayments feature attracted older borrowers who were coming into inheritance and wanted to be mortgage-free sooner.

Self-employed workers also expressed interest in the product as it took one years’ worth of accounts and the extended affordability appealed to first-time buyers particularly in London and South East. Also, the product could be suitable for those going through a divorce who want to buy their partner out of the family home.

Fitzpatrick continued: “Being first to the market we’ve already seen more lenders joining us in offering long-term products, so, yes – I’m sure there will be more. That said, moving away from short-term two-year deals is a totally new way of thinking about mortgages.

“There’s a huge job for the whole broking industry, to show consumers that choosing the right mortgage is not only about rates, but ‘true cost’ and how fees and other product features – like early repayment charges, overpayment facilities, portability, not needing to continually remortgage – can offer flexibility and certainty and are worth weighing up alongside rates. We’ll always welcome more customer choice in the market – it can only be a good thing.”

He said the product was for people who were mindful of multiple rate rises and inflation, adding that no exit fees would be “important for people who believe that this economic squeeze could be temporary”.

He said: “They’ll have the comfort that their mortgage repayments are protected, should base-rates rates continue to rise, if a Russian invasion of Ukraine does lead to trouble on the stock market, if inflation continues to gather pace, but at the same time, know that they can move their mortgage deal at any time, with no financial penalty.”

Perenna’s co-founder and chief operating officer Colin Bell said its banking licence application to become first covered bond mortgage bank in the UK had been “progressing well” and it was working with regulator and expected to gain its licence in Q2, then go live later this year.

He added that there were a few thousand people on its waitlist currently as recent talks of increasing interest rates had lead many to inquire about fixing their rate.

Bell added: “Brokers are also interested in the model, we provide them with stable cash flows over long periods of time, something they don’t have today, and a new flexible long-term fixed rate mortgage that will be great for their existing clients and also expands the market of potential customers.”

He continued that long-term fixed rate mortgages would “benefit borrowers across the board”.

Bell said first-time buyers could get a mortgage earlier as it could lend more, good quality mortgage prisoners stuck on a standard variable rates could also benefit as well as borrowers with equity locked up in property as it had no age limits.

He said regarding lender competition, Kensington and Habito launching fixed term rates and 10-year products “build a journey to a changing environment to proper flexible long term fixed rate mortgages”.

Bell said: “We think it’s great that the market is moving in that direction. Our mission is to create a nation of happy homeowners. That entails improving the mortgage market and making mortgages consumer friendly. Flexible fixed for life mortgages serve that mission.”

He said he expected long-term fixed rates would become the “most common mortgage product” in the UK, just as it had in US and Europe.

“They are good for consumers as well as national financial stability. Our covered bond model has the potential to fund all of UK’s mortgages and we see no reason why that could not happen,” Bell concluded.


Brokers expect increasing interest but flexibility issue

Long-term fixed rate take-up used to be fairly low in the UK, but as more options come to the market, they have become more competitively priced and increase in appeal.

Chris Sykes, associate director and mortgage consultant at Private Finance, said: “The premium you used to pay for a 10-year fixed was significant, often one per cent above a five-year fixed rate, that premium has come down significantly over the last year or so and has come down more in the last couple of weeks with some 10-year fixed rates almost reflecting some lenders five-year fixed rates.

“I see more people taking these options moving forward especially with the interest rate rises expected throughout this year.”

He reiterated the view that more lenders would enter the market and said it seemed to have become a “key battleground” for some lenders rate-wise over the past few weeks.

Sykes said the products were great for those “wanting very long-term security” and those “willing to pay a short-term premium for long-term insurance against interest rate rises”.

He added: “Often a reason cited is to avoid product, broker and legal costs every two to five years. Sometimes people have investment plans so take 10-year fixed debt on interest only with a hope of outperforming it on the markets.”

Sykes said the typical demographic tended to be older borrowers in their 40s and 50s, with children in secondary school or moving out and certain they would be in their current home in the long-term.

He said most long-term fixed rates were “well-priced” currently but one factor that impacted recommendations was “significant” early redemption charges, which is often one per cent per year remaining on the mortgage.

Sykes added whilst there had been “product innovation” with some lenders offering 10-year fixed rates with five-year early redemption charge periods, there was more that could be done in the space.

This was echoed by Greg Cunnington, Alexander Hall’s director of lender relationships and new homes, who said that once the details of longer-term fixed rates were explained the “lack of flexibility tends to be too important a factor against them”.

He added: “You have an early repayment penalty whilst tied in, so although they may seem a good idea to hedge against any interest rate increases if you want to sell your property, or release equity from your home, in the fixed rate period your options are very restricted.

“10 years is a long time to be able to predict your exact life circumstances. As always, customers who are interested in a longer-term fixed rate mortgage my advice would be to speak to an intermediary to ensure they can advise you on all of the pros and cons and take your unique circumstances into account when assessing if it would be the right option for you.”

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