Clients are more concerned about the outlook for their financial future than ever before, calculating for inflation on the cost of living, property prices, wage stagnation vs inflation, property value uncertainty or future rate rises.
There has therefore been a growing trend for longer term fixed rates across the client spectrum, seen as a solution to a harshening economic landscape.
This week, Mortgage Solutions asks: Will longer term fixed rates of five years or more become more of a mainstay of the market, and why?
Long term deals look set to be a growing part of the market, but I still expect they will need in-built flexibility and criteria benefits to really blossom.
Fixed rates have dominated the market for some time now. The pricing has been exceptionally low for years, and with base rate at or near rock bottom, borrowers have tended to prefer the peace of mind of being protected against increasing rates. Now that we are in a rising rate environment, borrowers are more likely to opt for a fix to lock in their rate.
Five-year fixed rates have grown in popularity, often overtaking the volume of the historically more popular short-term two-year deals. That has been helped by the sharp pricing that has seen the price differential narrow as well as borrowers looking ahead.
Longer term rates of 10 years or more have struggled to make the same impact so far. One factor will be the typically higher pricing, but we’re now seeing that objection eroded by the narrow margin between five and 10 years. With the economic backdrop shifting that’s likely to attract more interest.
The other factor tends to be the borrower uncertainty of whether to lock in for such a long timeframe, something that customers need to build into their thinking. Advice on the options will really help borrowers, particularly as more lenders have sought to combat that with reduced or no ERCs.
Longer term deals will affect repeat business, and that is inevitably true, but doing the right thing for customers will result in a mix that is ultimately what will help build business through referrals.
Our clients are opting for longer term fixed rates now more than ever and I don’t blame them. These rates are offering them security which is hugely important to most individuals right now as it’s one less thing to fret over. It also makes financial sense, as while rates have gone up, they are still healthy overall.
The down-side is that clients need reminding of those pesky ERCs. They don’t want to hear about the cons to fixing their rates for longer, they just want to get the deal done. But it’s our job to give them a balanced view taking everything into account. If their situation is likely to change in the next three to five years, it is not necessarily going to be the best advice to suggest a longer fixed term rate.
We are a still fans of longer-term fixed rates here at The Mortgage Mum, though there is the obvious consideration to our remortgage pipelines. We regularly recruit new talent who need to build their business pipeline from scratch. Previously, two-year fixed rates were the most popular and commonly used product, meaning you could expand business considerably in the first four to five years. With the rise in longer term interest rates, this is changing, which means we as brokers have to work harder to attract new clients, new mortgages and fresh opportunities in order to achieve the same results.
I don’t think this is a bad thing though. The mortgage world is always evolving and there are so many people who need a mortgage, protection, and finance out there – we just have to find them, or help them find us. If we focus on the decline in remortgage availability, we’re missing the opportunities to be better, and brokers need to keep evolving. The most important aspect is to do the best thing for our clients, and this is the ultimate security for some of them.
That said, 10 years is a long time, and we haven’t seen a huge uptake in those 10-year fixed rates yet.
This is the first time for many households will have experienced rates at one per cent and talk of future rises. Households will be affected differently nationally, but looking for stability will continue to be a focus for all as they look to the future.
Should they fix or even pay an ERC to secure a new deal now to avoid a higher future rate? Getting experienced advice from whole of market has never been more important.
In the last 10 years, the base rate fluctuated between 0.25 per cent up to 0.75 per cent where it remained until March 2020 when the pandemic dropped rates to 0.1 per cent. Accidental savers, low rates, stamp duty holiday and a surge in pent up demand, saw a year that no one could have predicted. But come October 2021, when rates where at an all-time low of 0.78 per cent, the signs of rate rises were coming through.
We are now seeing the highest inflation in 30 years, set to reach 10 per cent imminently. The average rate in this time as climbed to 2.35 per cent from 1.29 per cent.
So, with fixed rates at five years or even longer, how you manage the client in-between this time will be vital to ensure the client remembers you and you are supporting them.
Reputation is built on experiences, so with the costs associated with remortgage building the right partnership with clients and referrals will be key to your business growth.
Having an annual catch up to see if there is anything needed, like further borrowing or changes in circumstances, will ensure when it comes to remortgage or PT time the client remembers you and trusts your support. Adding to this by talking to your client about protection will allow you to support them during their fixed rate period too.
Specialist lending is a growing market to bear in mind at this point too. Learning about the sector and second charge offering will be vital when you have clients tied into a low fixed rate and hefty ERC to exit. Not to discount bridging and commercial with the market easing and lenders returning to pre covid criteria.