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Demand for long-term fixed mortgage rates is low, lenders say

Customer demand for longer-term fixed rates are currently low which is partially due to price and desire for flexibility, lenders have said.
The Treasury Committee questioned mortgage lenders yesterday on the impact of rising mortgage rates.
Evidence was given by Andrew Asaam, homes director at Lloyds Banking Group, Charlotte Harrison, interim CEO of home financing at Skipton Building Society, Santander UK’s mortgage director Bradley Fordham, home commercial director at Nationwide, Henry Jordan, and Paragon’s chief executive Nigel Terrington over a nearly two-hour long session.
When asked why long-term fixed rates of 10 years or more were not as popular as the UK as in countries like the US, lenders said customer demand for these products had not been high.
Asaam said Lloyds Banking Group surveyed customers’ appetite for longer term fixed rates, and “customers come back and tell us about the desire for flexibility and the preference for the shorter-term products”.
“I think, potentially due to the fact that [shorter term products] would have been the right thing to do over the last 10 to 15 years because interest rates trended down or whether that changes.

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“As we move through this [interest rate] cycle, we’ll need to wait and see. But the market for 10-year fixes, before we even think about 15 or 20 or 25 years, we think [demand] is [for] one or two per cent, low single digits. That’s reflective of the feedback we get from customers every time we survey them on products,” he explained.
Fordham said “brokers fulfill a really important role in the market” and they would put the customer needs first, and in some instances a long-term fixed rate would not be appropriate.
“It would depend on their situation. So as an example, if you’re a first-time buyer or you’re moving property, what’s most important may be how much you borrow rather than the actual rate that you pay, within reason, of course, and for a customer who’s coming to the end of their deal and is wanting a new product, it’s probably going to be about price,” he explained.
Pricing comes first
He continued that historically, longer-term fixed rates had been more expensive than shorter-term fixed rates so the customer advice had been centred around “what’s the cheapest for me now, I want certainty for a period in time but I also want some flexibility”.
“In the future, if long-term fixes were cheaper, then that might drive a different demand but certainly customer demand currently is for the short term flexibility,” Terrington added.
When asked whether brokers had a monetary incentive to offer shorter-term fixed rates as opposed to long-term fixed rates, the procuration fee paid to the broker was the “same amount irrespective of the length of the product, so there’s no incentive from a ‘they get paid more’”.
“From an advice guidelines perspective, there are clear guidelines for those customers, applied by the regulator, to ensure that it’s a good customer outcome and it fits their circumstances for this moment in time. So, if that customer needs or wants flexibility, as well as some certainty of payment, then the broker will give that appropriate advice,” he added.
Harrison said the mutual used to offer 10-year fixed rates but did not at this moment in time.
“It’s demand led. We just don’t see the takeoff and equally we think with peaks and troughs in terms of rate cycles and what that could look like, customers probably are actively choosing against that. They want the cheapest deal available to them, so it is demand driven,” she said.
Terrington said the lack of demand in the UK for long-term fixed rates was due to the way that mortgages were funded.
He said longer-term fixed rates had been tried by a few banks in the past with “significant failure to attract any interest”.
“The US has this essential protection against these early repayments,” he noted.
He added that the US had created the Fannie Mae and Freddie Mac around 80 years ago which facilitated the ability to create a government guarantee to sit behind the mortgage and then it is packaged into securities and traded, so it is the equivalent of a US treasury or UK gilt.
“If you want to create that then that’s another factor, but it’s taken them 80 years to get to where they’ve got to today,” he said.