"For some buyers right now, this could mean the difference between securing a mortgage and not securing one."
We’ve all had to work hard to keep the mortgage market moving during this recent period of economic upheaval and financial instability.
As house prices, interest rates and living costs soared, lenders have had to be increasingly creative and innovative with products, while taking a common sense approach to criteria, to keep mortgages accessible to as many people as possible.
This has meant allowing for customers with weird and wonderful employment or income streams, making it easier for family members to help first-time buyers, extending mortgage terms and being more open around adverse credit.
The common thread is flexibility and ensuring there are suitable options on the table for people with ever more complex financial circumstances and at all stages of their homebuying journey. It’s one of the reasons we work with a broad spectrum of lenders, to ensure our advisers have access to a range of products.
Another potential, yet often overlooked, solution to the affordability challenge is the long-term fixed rate mortgage.
As well as the peace of mind of a guaranteed monthly payment, there’s no need to stress-test a long-term fixed rate, such as 10 years, and for some buyers right now, this could mean the difference between securing a mortgage and not securing one.
It might feel counterintuitive to commit to a long-term fix when rates are ‘high’, but if we compare to pre-credit crunch, all we’re seeing now is rates at a more ‘normal’ level after a long spell of unusually low rates. Go back a bit further and rates were much higher than they are now.
Culturally, people are more accustomed to taking whatever fixed rate is lowest, with recent Bank of England data showing the vast majority of homeowners are on a two-year (34%) or five-year (52%) fix. By comparison, only 3% are on deals exceeding a five-year rate. This is also reflected in the availability of long term fixed rate products, which number in the dozens rather than the hundreds.
A mortgage market ‘revolution’?
It does feel like the longer-term fix is gaining traction as a talking point though. Earlier this year, the then-shadow chancellor Rachel Reeves was quoted in the national press promising a ‘revolution’ in the mortgage market to open the door to 25-year fixed rate deals.
The issue sparked debate, especially around the barrier of early repayment charges (ERCs), and the market responded to some extent with a handful of lenders highlighting incentives such as a five-year cut off for ERCs, or agreeing to waive them in certain situations, such as a house move or repayment. It will be interesting to see what will happen on this front now that Labour are in power.
While a 10+-year fix hasn’t been the norm, this could well shift in response to the changing economic environment. We’re already seeing a shift in attitudes towards later life lending as a workable solution to some of the challenges facing buyers and would-be buyers in today’s market.
As with all mortgage products, one size doesn’t fit all, and while many are happy with a shorter-term fix, there will also be scenarios where a long-term deal presents the best solution, and these are conversations intermediaries need to be having with customers.
For people struggling with affordability stress tests, for those who don’t plan on moving for the foreseeable, and those who would just appreciate some long-term stability after the upheaval of the last 18 months, a 10+ year fix could be worthy of consideration as part of broker-led discussions.
Any increase in demand for the existing products will surely lead to greater variety and choice from the market.
We can only ever use a best guess to determine what will happen with interest rates; ultimately if brokers are armed with all the facts, and aware of all the options available, they can help customers make an informed decision about the product that is right for them based on everything we know at the time.
