First published by Financial Reporter
The long-term fixed-rate mortgage market has tended to create much more industry debate over the past 20 or so years than it probably deserves. Which might seem rather odd for a proposition which has had limited consumer appeal.
As you’ll recall, it has often been Governments of the day who have been more focused on creating a vibrant long-term, fixed-rate mortgage sector, flying in the face of demand, or rather lack of it.
Just recently though, there appears to have been some movement, particularly in terms of new lenders exploring whether this is after all a part of the mortgage market which can appeal to a larger cohort of borrowers. Stonebridge has been approached by a number of firms who see great potential in longer-term fixed rates, and we’ve been happy to solicit the views of our network members to see whether a proposition can be invented which might have wider consumer and broker appeal.
To do that, we recently went out to a number of our AR firms to ask them about their views on long-term fixed rates – what would potentially make them more consumer friendly? What were the key concerns both they and their client might have with them? What the benefits might be? And whether there would be any regulatory concerns or risks raised as a result of greater take-up? My own, perhaps prejudiced, view is that consumers deserve choice and regular reviews such that long-term fixed products could be deemed to be a straight jacket which discourages ‘shopping around’ during the term.
It will be no surprise to learn that the response from brokers was mixed, and of course advisers highlighted some of the key issues that have been levelled at these products over the last couple of decades. Those being issues around pricing, how long the ERCs would last for, the perceived lack of client portability over that time, a focus on the changing needs of a client and how they could be addressed, and of course procuration fee payments and how that fits into lenders’ distribution models.
These types of concerns are not new, but I was also struck by some of the responses we received in the context of potential complaints in the future. A number of firms highlighted their concerns that, by recommending a 20/30-year fixed-rate product, they might be leaving themselves open to complaints if, for example, the ERCs are later deemed to be too aggressive, or the client finds out they can’t borrow more at a later date from the primary lender, or if the rates are seen as uncompetitive over an extended period of time.
Advisers are often criticised for being averse to such products merely on the basis of the procuration fee model, or the fact they wouldn’t be able to easily remortgage a client after two/three years, but these are not the only factors they consider.
After all, would a long-term fixed rate mortgage cut out that client interaction/diminish the client relationship which would make regular reviews of their other needs, for example, protection or GI, less timely? There’s nothing to suggest such regular reviews aren’t possible, even without it covering mortgage advice due to the long-term product, but the client might believe reviews are unnecessary for the next 20/30 years and be resistant to adviser engagement during that term.
There’s no denying there is a space for long-term fixed-rate mortgages, however the major question is just how big that opportunity is. My own feeling is this product area is a specialist niche which deserves innovative product design but those who think this may be a mainstream offering, like it is in other European mortgage markets for example, may be overly optimistic.
Lenders who increase activity in this space, may also have to overcome an ingrained consumer desire to shop around. Indeed, the whole consumer journey – certainly over the past two decades – has been forged within a competitive space, where consumers have been actively encouraged to look at what is on offer elsewhere, and not simply ‘make do’ with their existing products, because the likelihood is there will be opportunities to save money by moving. This consumer appetite gave rise to the hugely popular and successful price comparison sites which didn’t exist at all in my early career.
When a consumer is tied into a long-term fix of 20/25/30 years – even if there is a ‘break clause’ designed into the product – that ability to shop around is presumably diluted for many and impossible for some. Consumers are very savvy in that respect and may feel this constraint is a price not worth paying.
UK consumer psyche has changed and the increased take-up of advice is a result of that greater understanding of what constitutes the best product for their needs now, and a recognition this is likely to change in the future.
So, while I of course will give those lenders who are launching – or perhaps seeking to launch – in this space our support, we should perhaps not think this is a panacea for our market. It is perhaps most likely to appeal to those at the start of their mortgage journey, especially if there are high LTV products available, and to be successful it will also have to address many of the concerns raised above.
The better operators will see those potential blockages and design solutions, I’m sure. Keeping the adviser and consumer mutually satisfied, is key.
Rob Clifford is Chief Executive of Stonebridge