Speaking on a panel at Deal Catalyst’s Investors’ Conference on UK Mortgage Finance, Simon Webb, managing director for capital markets and finance at LiveMore, said that insurers and pension funds had a “huge appetite” for fixed for life products, especially in equity release.
The company, which has been lending for around two years, offers fixed for life products to those aged 50 and over.
He added that when it came to retirement interest-only fixed for life products there were “interest levels” but as it was a newer product and there were affordability considerations, long-term investors were “still getting their heads around the product”.
Webb added that a “big challenge” was the interest rate environment, with rates expected to rise for another year at least. He said that this raised the question of whether the “boat had been missed in terms of locking in for a long period of time at a low rate”.
He continued that there was a “cultural challenge” as UK consumers were not accustomed to taking out a long-term fixed rate, traditionally opting for two or five-year fixed rates, and that there would need to be a “big education piece” for consumers.
Webb noted that there were a lot of benefits, especially for older customers as it gave them the security of fixed payments for a longer period of time.
He said that the market is “evolving”, pointing to an increase in 10-year fixed rate products as well as the launch of longer-term lender Perenna.
Broker fee, short-term preference and regulation are barriers
McClelland said that as an “affordability-based lender focused on first-time buyers”, lifetime fixed rate would be a very “interesting product”.
However, he said that there were three main barriers to the take-up on long-term fixed rates, one of which was broker remuneration.
McClelland said that typically brokers gets paid 40 basis points as a proc fee, and “selling a lifetime fix is difficult unless you change the approach”.
This could mean linking the proc fee to the rate rather than amount of the mortgage.
He agreed with Webb that there was also a cultural challenge to long-term fixed rates, noting that people expected to move in around two or three years. However he said, in actuality, the average time between moves is more like 15 years.
The last barrier was around product and regulation. He said that due to Mortgage Conduct of Business Rules around affordability, lenders could not take into account future earnings or future earnings potential, which had an impact on pricing.
“It’s got to be competitive. It’s got to give them the flexibility to take that mortgage with them if they move or allow them to repay it if the circumstances change without huge penalties, and then trying to marry that up for the funders one gets challenging.
“So, I think there is a world in which a product would work but there’s quite a lot of barriers to making it happen,” McClelland explained.
Consumer Duty could place focus on long-term fixed rates
Peter Beaumont, chief executive of The Mortgage Lender, noted that his firm was also “looking closely” at longer-term fixed rates and with the current economic environment and improved product design they were much more attractive than before.
He said: “If it’s going to happen, we’re probably on the cusp of it happening because the product design is so much better than it was.
“You’re building all the flexibility into those products that the consumer wants. Relative value is better now because they were very expensive at one point, and we’ve got an inverted yield curve at the moment which also helps.”
He said that Consumer Duty, which is new regulation from the Financial Conduct Authority, could help the proliferation of long-term fixed rates.
“Consumer Duty is going to shine a new level of focus on fair value to customers and making sure that the broker is meeting the needs not just now but in the future too. That could help proliferation of longer-term fixed rates as well.”
