As Virgin Money took what some considered a bold step in launching a 15-year fixed rate mortgage, Mortgage Solutions asks: are longer term products the future of the market, why might that be and just how will brokers maintain a relationship with clients with such lengthy downtime periods?
Andrew Asaam, director of mortgages at Virgin Money
We have seen a positive response to our seven- and 10–year fixed products since their launch last year and wanted to further extend the choice available to consumers.
We are looking to attract both home movers and remortgage customers, who are seeking long-term interest rate certainty, knowing that their monthly payments will not change for the next 15 years.
Mortgage advisers have been advising on multiple year products for some time. These products are an extension of that. Relationships between the adviser and their customer are maintained in a number of ways through updates and other products such as life insurance and home insurance and so the length of a fixed rate mortgage should not change that dynamic.
Advisers have to recommend the right product for the customer now, taking account of their circumstances, future intentions and attitude to risk. For some customers, this product will be right for them now and we are therefore filling a market need.
It is all about providing customers with a choice. These products provide customers who want it with long-term interest rate certainty, knowing that their monthly payments will not change for the next 15 years.
Lilla Dilliway, director – mortgage and protection adviser at Bluewing Financials
Whilst every client has their own reason for preferring a shorter or longer-term deal, ultimately, it’s a combination of things. Recently, it’s been largely due to Brexit and other events feeding a feeling of uncertainty. Also, long term fixed rates that are not much higher than their short-term counterparts, so clients don’t mind paying a little extra for avoiding the hassle and potential costs of a remortgage. Lastly, the changes in buy-to-let (BTL) assessments favouring five-year BTL fixed rates are often taken out by necessity rather than choice.
I’m not close to the fire to be privy of the reasons for political and higher-level financial decisions, however, I’m sure banks have their own reasons for making longer term deals more attractive, just as the political leaders are shaping the BTL landscape in a certain way for a reason. I can make an educated guess, but it’s perhaps best to discuss it another time.
Changing the “traditional” setup from two-year cycles to five-year ones is definitely a challenge to brokers and keeping in touch with clients is even more important than ever. Fewer remortgages may increase the competition for new clients and force brokers to focus on selling insurance.
As a side note, there are client preferences which are completely independent from UK banking and politics. For someone who works abroad occasionally, dealing with frequent remortgaging is not practical. Some are used to fixed rates for the duration of the mortgage term while others who expect asset appreciation don’t need the flexibility of a short-term deal.
Daniel Unthank, managing director of Holbrook Property Finance
As a directly authorised firm, we offer all available rates. Every client is different, with some wanting the flexibility associated with lifetime variable rates and others the stability of longer-term fixed rates.
We’ve certainly noticed an increase in demand for five-year fixed rates. Reductions in pricing and the gap in the payable rate between two-year rates and five-year rates has made them a much more appealing option. However, we haven’t seen a huge demand for longer term fixed rates of 10 years plus. Most are put off by the early repayment charge structures that these invariably come with.
I don’t think this will be the way that the market is heading. I think fixed rates of 10-years and over will continue to be a fraction of lender’s product ranges. Maintaining relationships is all about regular contact regardless of the product term. Having that strong bond with clients means that they naturally respond when it’s time to remortgage.
When you start factoring costs such as arrangement fees and, potentially, valuation and solicitors, it can easily be more expensive to remortgage every couple of years. If the pros and cons are fully explained to clients, there should be no reason for their trust to be broken.
The general feeling is that rates must increase at some stage. The uncertainty is when this will happen. Fixing for 10 years now may sound very attractive, but if rates do increase over that period there is the danger of ‘payment shock’ at the end of the product term.