Why do brokers rarely recommend long term fixed rates?

dwsjarcmcd

I regularly see posters asking for opinions on these and many brokers respond negatively about them, which given the limited price differentials between 2 , 5 & 10 year rates, I find hard to understand.

The reasons are usually along the lines of

- 5/10 years is a long time - Indeed, but most under the age of 45 will have limited prospects of paying off their mortgage and they will always need a roof over their head, so they will need to fund it somehow. Why is one 10 year fixed worse than 5 x 2 year fixed rates? Not sure I get this point.

- Circumstances can change (move house, kids, job etc). Again of course, but these things will happen no matter the term of the loan. Mortgages are much more flexible than before, so with portability, overpayment options, etc. these should not be an inhibiting factor.

- Stuck with an expensive loan - Again this could be the case but it just as possible that buying a 2 year deal today could mean buying another more expensive 2 year deal in 2 or 4 years time, depending on movements in the money markets. Also even if the price falls, at least you won't be shelling out hundreds in fees every 2 years. The truth is no-one knows, but if you have a longer f/r then you have paid for certainty, which if you could afford on day 1, then you are probably more able to afford in the future.

There are lots more reasons for people to consider these, such as many lenders now offer to lend you more than a 2 year fix, you don't need to remortgage with the associated hassle (not to mention substantial fees involved, even with transfers of products if you don't change lender).

They are not for everyone, but they have a growing place in the market, particularly when they are priced so close to 2 year fixed. It would be interesting to see what the real costs of 5 x 2 year fixed rates v 1 x 10 year fixed rate would be, if todays prices were used today for the next 10 years, including all the fees that would be paid. If only I have the time (or ability) to do that!

jamesd

Long term fixed rates cost more in the predictable short term. They also tend to come with long and inflexible tie-in periods. Unless someone says they want to guarantee fixed payments or take a view that rates will increase, suggesting fixed rate for a long term would be suggesting a more expensive product and that would be quite hard to explain as good advice.

A ten year fix would have a higher interest rate premium than five two year fixes, to cover the increased interest rate exposure for the lender, so it would be tying in to higher payments. But you'd get a better stability of payment guarantee for the extra cost, if you want that.

Personally, I don't think much of two year fixed interest deals because of the very short term for which the protection against interest rate changes is provided. Five or ten year or term of mortgage fixes seem more useful to me for those who want fixed commitments.

dunstonh

Many people are still stuck on 15-25 year fixed rates taken out during 90s around 9.99%. At the time, the 9.99% looked attractive but look at it now.

If someone told a broker that they wanted a long term fixed rate then that is what would be reviewed. However, I would expect the broker to also present alternative options that may be better value for money. After all, that is what the broker is for.

MortgageMamma

I agree with DunstonH - it's all down to the clients needs and what the clients request, and very few people have enough foresight to know whats going to happen to them in the next ten years. I do highly favour 3 and 5 year fixed rates, but, the only time I will recommend a 10 year fixed rate is if a client craves security in payments above all else and they are fairly close to the end of their mortgage term, say 10 years.

dwight-van-man

On the brokjers assumption that they would be able to retain the client, 2 year deals represent 5 proc fees as opposed to one if a ten year deal is sold. While many brokers are moving away from this mentality, particularly those who have a robust recontact system which sees them regularly in touch with the client for other business, referrals etc, the majority will steer the client towards a short term fix simply so the can rebroke it in two years time. I have this conversation daily with brokers and have been told repeatedly that they 'don't beleive in long term fixed rates'. Yet few have actually researched the products available over longer than five years. I spoke to a broker last week who sells exclusively two year deals and who told me he currently has over 70 clients who's fixed rates have matured this year and who he is yet to contact to arrange a new deal. Yet he complains when the lender offers the client a new deal, can't understand why he gets little referral business and is suffering from insurance clawbacks as his clients go elsewhere and another broker rebrokes their life cover, probably on worse terms. So everyone loses, yet he charges a client fee!

I totally agree that long term fixes are not suitable for everyone, but if the client isn't asked the right questions to determine this in the first place, how would you know?

payless

The long term tie in can be a big reason... remember placing a lot of the SLB 25yr capped though... as only a 5 yr tie.

payless

jamesd wrote:

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Personally, I don't think much of two year fixed interest deals because of the very short term for which the protection against interest rate changes is provided. Five or ten year or term of mortgage fixes seem more useful to me for those who want fixed commitments.

agreed.... unless the rate is very competitive compared with a tracker I don't generally do much 2 yr fixed .. security usually means 5 yrs.....

HelpWhereIcan

Hi dwsjarcmcd

I cannot speak for other brokers, nor for every client I speak with, however I will try to address each point you raise.

dwsjarcmcd wrote:

I regularly see posters asking for opinions on these and many brokers respond negatively about them, which given the limited price differentials between 2 , 5 & 10 year rates, I find hard to understand

I, for one, would not like to be seen to be overly negative about long term fixed rates (10 & 15 yrs), but I do have a duty to ensure that my client understands both the pros and cons of any course of action.

Personally, I cannot recall ever 'persuading' anyone who asked me for a 10 year fixed rate to go for a shorter one - dwight-van-man gives the very reasons why I would not (referrals etc). I have arranged quite a few 5 year deals (not just fixed rates) but these are, I will admit, still in the minority as far as my business goes. Although there have been a few questions on this forum regarding them, in my day to day life as an adviser I get few requests and few people give me the impression that they would be suitable for such a long term fixed rate.

dwsjarcmcd wrote:

- 5/10 years is a long time - Indeed, but most under the age of 45 will have limited prospects of paying off their mortgage and they will always need a roof over their head, so they will need to fund it somehow. Why is one 10 year fixed worse than 5 x 2 year fixed rates? Not sure I get this point.

IMO, this is not just about the customer's circumstances changing. The mortgage market can change incredibly - would you have thought that self cert, flexible mortgages, adverse credit, offset, equity release, buy to let etc etc wold have become as common as they are 10 years ago? Would you be happy if you were unable to access these new features because you were tied in to a 10 year deal that looked attractive 7 years ago? If this happens in the future, there will be many claims companies willing to help the customer get redress from the ill informed, commission hungry adviser (some companies pay more for long term fixed rates than for 2 year ones). As dunstonh points out, most advisers will have customers who have been affected by the once attractive 10 year fix @ 12%.

You just have to look at how advice in respect of endowments has been retrospectively assessed using today's market and rules to know that any adviser needs to see what the long term consequences of their advice could be.

For example, what could happen to our rates and mortgage market upon entry into the Euro and what effect will Basel 2 have upon the way mortgages are underwritten and structured? Do I want to tie a customer into what may become an 'unfair', high fee contract just because the mail on sunday says 25year fixes are the way forward cos the Americans have them or because there is the possibility that mortgages may be less flexible in the future?

What effect will several Eu 'inititaives' (MFiD, TD, MAD, FSAP :eek: )have on the UK mortgage market, the way products are funded and structured?

dwsjarcmcd wrote:

- Circumstances can change (move house, kids, job etc). Again of course, but these things will happen no matter the term of the loan. Mortgages are much more flexible than before, so with portability, overpayment options, etc. these should not be an inhibiting factor.

In fact, in many cases they are. Portability is not the be all and end all. A lender may insist that any extra borrowing is on what is an uncompetitive deal at the time, meaning that the customer may have been better off having the whole market to choose from.

Will that lender be willling to increase the mortgage by enough to cover the new purchase? The customer may be better off having the whole market to choose from.

If the property is an unusual type, will the lender be able to lend? The customer may be better off having the whole market to choose from.

What changes in underwriting policy could mean that the current lender is just not right for the new purchase? The customer may be better off having the whole market to choose from.

What if the customer experiences payment difficulties 2 years in, puts them right and then the lender refuses to entertain an increased loan in year 3? - Admit this is rare, but this does happen.

dwsjarcmcd wrote:

- Stuck with an expensive loan - Again this could be the case but it just as possible that buying a 2 year deal today could mean buying another more expensive 2 year deal in 2 or 4 years time, depending on movements in the money markets. Also even if the price falls, at least you won't be shelling out hundreds in fees every 2 years. The truth is no-one knows, but if you have a longer f/r then you have paid for certainty, which if you could afford on day 1, then you are probably more able to afford in the future.

That is the main benefit of a long term fixed - but as dunstonh & MM point out, it is down to individual circmstances etc - My first mortgage was a 5 year fixed, rates dropped and I 'lost'. Then I had a 3 year fixed, rates rose and I 'won' - guessing the markets cannot be done, but what can be done is making sure that when any changes happen, you have the choice of the whole market - many lenders are introducing competitive 'retention' products which may avoid the cost of remortgaging every 2 years, but if you are happy to be restricted to one lender and their policy for 10 years and need to know where you are for 10 years, then a 10 year fixed rate is for you.

dwsjarcmcd wrote:

There are lots more reasons for people to consider these, such as many lenders now offer to lend you more than a 2 year fix, you don't need to remortgage with the associated hassle (not to mention substantial fees involved, even with transfers of products if you don't change lender).

They are not for everyone, but they have a growing place in the market, particularly when they are priced so close to 2 year fixed. It would be interesting to see what the real costs of 5 x 2 year fixed rates v 1 x 10 year fixed rate would be, if todays prices were used today for the next 10 years, including all the fees that would be paid. If only I have the time (or ability) to do that!

You have got basically it right there, and I really do not think you would get many objections from most advisers to these points. However, the reality is often different.

On average we move every 3-5 years and even a ported product has valuation fees, fees for the new borrowing etc etc and it may be better to have the choice of every lender as I said before.

Your scenario is spot on for someone who will not move, need to borrow extra, need to extend etc etc for the next 10 years - and I would argue that this is more likely to apply to the over 50s than the the under 45s you refer to.

Sorry for the length of my reply, but I think you asked an excellent question and it was one that deserved a full and honest answer.

MortgageMamma

I was gonna quote you on that one HWIC, but I decided not to! :rotfl:

An excellent helpful post, if I may say so, I had similar thoughts, but I'd never have been able to convey them so well (or spend all that time typing)

Thanks for your thoughts on this. appreciated.

Lisa

TangentMan

Lets set aside the proc fee debate (and there is a new on of those with regards to proc fees and retention programmes). There is the mindset. Brokers and their cleints live more in the "rate tart" world and therefore the ability and predeliction to swap product frequently to chase the optimum rate is inherent.

That's not to say this applies to all customers, but aside from FTBs i suspect most brokers find remortgagers more amenable to shorter terms.

MortgageMamma

TangentMan wrote:

Lets set aside the proc fee debate (and there is a new on of those with regards to proc fees and retention programmes). There is the mindset. Brokers and their cleints live more in the "rate tart" world and therefore the ability and predeliction to swap product frequently to chase the optimum rate is inherent.

That's not to say this applies to all customers, but aside from FTBs i suspect most brokers find remortgagers more amenable to shorter terms.

Not at all, I actually educate my clients to consider the escalating impact of added fee's etc on the capital balance of a mortgage after x amount of years. Most clients understand what I am trying to do, but you get the clients that are stubbornly blinkered to looking at rates and monthly payments alone and anything further than this goes in one ear and out the other. It is very frustrating sometime when you try to do the right thing by your clients, you know its the right thing, but they just can't see it...