FEB 2015 – Longer term fixes

There are currently some phenomenal longer term fixed rates on offer, but something seems to prevent UK consumers from opting for these attractive options.  In a world where advice is now the norm, understanding consumer needs and their attitude to risk is key.  So in making recommendations any adviser has to be mindful of committing the consumer to a product that might leave them with limited flexibility to move, raise further funds or make additional repayments.  This has been exacerbated by the reaction of some lenders who have made porting their product a lot more difficult.  The prescriptive application of terms and conditions or applying affordability measures that are not required by the FCA has driven caution amongst some advisers.  This is a natural reaction against the product rather than a more measured approach against certain lenders.  There is a need for the more responsible lenders to apply pressure on their peers.

It might also be that the consumers most likely to take up these longer term products are still tied into another fixed rate product.  There are also still many consumers who are property or product prisoners, often due to historic self-certification or interest only borrowing.  So the flood might have to remain a trickle.

One of the product features that most limits an advised recommendation is the level of early repayment charges.  Where these are both significant and flat over the product term, it is difficult to justify recommending a longer term product.  The European Mortgage Directive, which comes into effect in March 2016, states that the lender is entitled to fair and objectively justified compensation for potential costs directly linked to early repayment of the credit and should not exceed the financial loss of the creditor.  This should drive more graduated redemption penalties, with lenders taking a more balanced view on the real costs of settlement once half way through the term of any fixed term product.

If we could see longer term fixed rates with early repayment charges that reduce over the term to zero towards the end of the term then we will see more consumers likely to want to play.  Will lenders come to the party?

Robert Sinclair