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Advice purely based on interest rates potentially ‘dangerous and unsuitable’ – analysis

  • 23/08/2022
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Inflation and rising interest rates are creating a conundrum for some mortgage advisers over whether a short or longer-term loan fix is better for borrowers.  


The era of rock bottom interest rates has been definitively ended by the Bank of England this year, with base rate jumping six times since the end of 2021.

However, some experts predict this could be just a passing trend, with rates falling back again, alongside inflation next year.

On the other hand, higher mortgage costs could be the ‘new normal’.

Lewis Shaw, founder and mortgage expert, says it is challenging to give advice with mixed signals for the future.

He added: “Do you recommend a two-year in the hope inflation will ebb away in the next 18 months, or do you opt for the five-year thinking this will be with us for a lot longer and get much worse, to protect clients against further rate shock?”

Recent comments on Mortgage Solutions’ articles suggest some advisers are not currently recommending five-year fixes.

Matthew Poole, director at Poole Family Financial, said: “It’s been widely reported that a recession is around the corner. It’s our job to explain that during a recession not as many people are in a position to borrow money. Therefore, banks’ lending levels may dip and, with a lack of demand, typical interest rates will fall.

“In this scenario you may be then disadvantaged by taking a five-year fixed rate.

“Five-year fixed rates still have a part to play in this ever-changing mortgage market, but it shouldn’t be the default, go to rate. It needs to be right for the client.”

Imogen Sporle, head of regulated and term finance, Finanze, agrees that two-year fixes could be more favourable.

“In my personal opinion, a two-year fixed product at this stage may be best as experts are predicting rates will be on the rise from now until the end of 2023 and should return back to normal during the second quarter of 2024.”

However, she gives clients a ‘for and against’ for both a two and five-year fix so they can make a more informed decision.


Impossible to predict the future

In the age of increased mis-selling claims, the possibility of getting it wrong is a significant worry for many advisers.

Jonathan Burridge, founding adviser at We Are Money, said the real danger is recommending one product over another because of personal views.

He added: “The product selection is based upon many factors, affordability, client plans, clients’ preference – fees for example, products available to them and their attitude to risk.”

Rob Peters, principal at Simple Fast Mortgage, agreed.

“Any adviser predicting future interest rates for their clients is heading down a dangerous path of potentially unsuitable advice.

“The choice of whether to fix and for how long should always be based on the customer’s circumstances and needs.

“It is impossible to predict the future no matter how experienced or qualified the adviser is.”

He added: “Advisers should absolutely help borrowers understand and explore their own views towards interest rates but putting forward a personal prediction is a step beyond advice and into speculation.”


Interest rates just one factor in recommendations

Consumers can make a complaint to the Financial Ombudsman Service if they feel they were recommended an unsuitable product.

But the outcome would depend on their needs and circumstances at the time – interest rates are just one factor in considering whether a product is suitable.

Imra Hussain, director at Harmony Financial Services, said that whether the client plans to move and has home extension plans are among the issues that could affect recommendations.

He added: “Every pro and con should be covered with clients, as no one knows what rates will be in two, three, five or even 10 years’ time.”

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