So, this week Mortgage Solutions asked brokers whether they see borrower demand growing, what the reason behind this is, and how likely they are to recommend them for their clients.
Over the last three years we have seen a general shift away from two-year fixed rates to five-year products, with cost of funds being a key driver of customer behaviour.
The discrepancy in rate is largest between 95 per cent loan to value (LTV) and lower brackets, however this gap has reduced significantly over the last five years. The difference between two-year rates at 80 per cent LTV and 90 per cent LTV now averages 0.5 per cent, whereas it is just 0.25 per cent on five-year products at the same LTVs.
We still see some reluctance from some first-time buyers to lock in for longer at initial purchase due to the general uncertainty surrounding their future. For this reason, we are doing more two-year fixed rates in this area, peppered with the occasional three-year rate, especially at higher LTVs.
This changes when you get to second-time buyers and re-mortgage application, with lower LTVs, where the demand for five-year products jumps massively. These are specifically prominent in buy-to-let applications where a greater loan size can be achieved due to more generous stress tests.
A key driver of longer-term products is the impending uncertainty around Brexit, which thankfully, the length of this commentary prevents me from remarking on further.
Another factor is the education from our lending partners who have advised that swap rates are lower than they have been in a while, which in turn has led to more competitive short term rates.
Coupled with this is the confidence lenders have in the base rate holding at current or similar levels, which enables us to impart invaluable information which the clients are then able to use in their decision as to which products they opt for.
Rates are fantastically low at present and with all of the uncertainty around Brexit, why wouldn’t someone want to fix long term?
Especially when the alternative is to go on either a variable rate which is likely to only increase, or fix for two years and take a gamble on what the client will refinance to when their deal ends?
With the pricing of longer term fixed rates being such great value, and not a million miles from two year money, we are seeing a great deal of borrower demand.
By the time you’ve factored in the cost of refinancing in two years, the difference in pricing is often reduced further and you have the certainty of being able to budget for longer, meaning this would be a great recommendation for many clients.
However, what we recommend very much depends on the individual client and their future plans. Somebody looking to sell within a few years might not be suited to a longer term fix and its accompanying exit penalties, for example.
A lot of buy-to-let landlords are being forced down the five-year route as these products have more generous interest cover ratio (ICR) calculations compared to two-year rates. Many landlords, particularly portfolio clients, want to have the flexibility that shorter term rates offer.
The Prudential Regulation Authority (PRA) regulation has seen that change dramatically and a huge number of landlords are being forced to take a product which does not really fit their future plans and aspirations, yet is the only way to get close to the borrowing requirement.
I have definitely seen an increase in the demand for longer term fixed rates, with five-year fixed rates being the most common.
The narrow spread between two- and five-year fixed products at certain loan to valuations makes it easier for borrowers to consider a longer product term.
This and the slower pace of house price inflation, and ever burdensome cost of stamp duty, means people tend to have a longer term view with property purchases overall and their mortgage choice is beginning to reflect that.
However, longer term fixed rates are not suitable for everyone, and it very much depends on where the individual is in life.
For example, those upsizing to family homes tend to favour five-year fixed term products provided there are no plans to disturb the mortgage in order to capital raise for home improvements in the short term, or make a large lump sum overpayment to reduce the mortgage.
Conversely, first-time buyers are often better suited to short term products, and those with smaller deposits of five per cent may find a five-year deal too expensive to begin with.
From an advice perspective, the length of fixed term a client embarks on is one of the most important considerations given the potential downside of stiff early repayment penalties. By taking the time to understand a client need and ensuring they understand the benefits and limitations of the various product terms on offer I’m happy to recommend them, and do so on a regular basis.