The short-term fix debate

Rob Clifford

April 26, 2016

Rob Clifford is group commercial director at the SDL Group which is a shareholder at CENTURY 21 UK, MoneyQuest and Stonebridge Group

Throughout my time in the world of mortgages, the debate has been ongoing about longer-term fixed-rate mortgage take-up. Specifically, why this type of product still exists only in relatively small numbers, both from a lender delivery point of view and certainly in terms of borrower appetite.

The argument raged 20 years ago, and is still being talked about today. An answer to the question of why short-term products are still the mortgage of choice for most in the market, and why there hasn’t been a Damascene conversion to long-term rates, has often eluded those who have tried to tackle it.

When attempting to form my own opinion, I am often reminded of Professor David Miles, former MPC member who was tasked back in 2003/4 with delivering his view on long-term, fixed-rate mortgage take-up, and whether the Labour government of the time could do anything to move more of the UK’s mortgage borrowers in this direction. His report was widely publicised and could best be summed up by the notion that, frankly, no-one really wants a long-term fixed rate mortgage, especially – from a borrower’s perspective – if they come with early repayment charges (ERCs) spread across many years which make it very expensive to get out of the mortgage should the necessity arise.

At the same time, many lenders – notably the building societies – are actively constrained by regulatory requirements which mean they can only offer fixed rate mortgages on a relatively small amount of their lending. Then, of course, there are those lenders who are not too enamoured by the longer-term fix in the first place, because they actively want borrowers to remortgage to them, or perhaps move from the initial, loss-leading, short-term rate to a more profitable SVR relatively quickly.

Now, it’s fair to say, we have reached something of an impasse when it comes to promoting longer-term fixes because, perhaps quite rightly, lenders are able to say, ‘borrowers don’t want them and we’re not too keen on offering them anyway’.

But the debate has burst into life again recently with comments from AMI regarding building societies and its suggestion that these lenders are focusing on making their shorter-term products more competitive rather than allowing borrowers a more competitive, 5-year fixed rate option. Perhaps the assumption here is that the mutual sector should be offering this type of product provision far more than its private lender brethren, given that it is supposed to be the part of the market most closely aligned with satisfying a variety of borrower needs.

I’m not so sure this is quite correct. To my mind, the building society has done more than most in offering a wide range of mortgage products that are available to a wide range of borrowers, and their multiple wants and needs. Speak to most advisers and householders and they will tell you that demand for longer-term fixes is pretty low, for the reasons above, but also because many people are simply uncertain about what the next two years will bring, let alone the next five or 10 or even more.

Having the flexibility of a short-term rate means that should their circumstances change – and it is always worth remembering that many people can suffer major upheaval and change in their lives within a short space of time – they have the opportunity to remortgage or access equity, or do whatever they need to do. Having to wait 3, 5, or even 7 years-plus to be able to do this, while knowing that you’re going to have to pay a considerable charge for the privilege, is reason enough to turn most people off. Plus, given we’ve had seven years of a 0.5% base rate, it is perhaps not surprising that most borrowers want to go short-term with their mortgage choice simply because of the uncertainty of what rates will do next.

I’m all for mortgage choice, and I’m all for the availability of long-term fixed rate mortgages. But firstly I don’t believe it’s the sole responsibility of the mutual sector to deliver them, and secondly I don’t believe you can lead the borrower horse to water and make it drink. Given the focus on monthly mortgage payment by most borrowers, is it so surprising that most will opt for the lower amount over the shorter-term, rather than pay more over the longer? I don’t think so and therefore I think this is one market status quo which is likely to stay solid for some time to come.

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