Why do brokers rarely recommend long term fixed rates?

dwsjarcmcd

HelpWhereIcan wrote:

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%.

While understanding the context of the point, the vast majority of the features you referred to don't apply, e.g. self cert, adverse credit, BTL. Flexible features are something that I would expect to be included in the OP's wish list. Offsetting tends to be more expensive. If all these features are so important, how is it that the Portman's annual interest 'policy' receives so much broker support. Probable answer because they do this to deflate the rate, make it look best buy but the actual cost is more than others with daily interest and a higher rate. Yet many go just for the rate. I also think that the current flat yield curve and interest rates at sub 5% for 5 & 10 years is miles away from the conditions of 12% fixed rates.

I also see brokers having sold dollar mortgages a few years ago without understanding the real implications on their customers, which have been massive. Sold because they were cheap, and brokers didn't understand the risks.

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?

To the above list you could IFRS, which will arguably have he greatest impact, but does this not add weight to the arguement for using longer term FR's? Again, open to interpretation.

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.

Many lenders will treat this additional borrowing as a new customer rate. A much bigger concern is the potential for lenders (Halifax alledgedly) to increase the price of remortgages because they can't earn the margin on them because of churn. This could particularly be the case in 2/3 year rates.

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.

They may, but there is a good chance that the existing lender, with the payment history will be keen to retain.

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.

Again you could cite millions of such examples but they apply in many other instances i.e existing borrower transfers, which are on the increase because of exit fees and massive application fees. Just a long term fixed rate with fees and an unknown price and where the lenders have much more control of their margins.

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.

I accept the first point but what you have is certainty, what you didn't know was the price of your 3 year deal a year before you bought it. I would suggest that lenders are far from introducing competative retention products, they are wider margin that new products, priced cleverly to deter people from moving.

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.

Agreed it may be but then again it may not. My point is that with 5/10 year money at sub 5%, now may be a good time to hedge bets (actually a few months ago would have been better!)

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.

No problem, thank you for the time you have taken, enjoyed the debate!

HelpWhereIcan

dwsjarcmcd wrote:

While understanding the context of the point, the vast majority of the features you referred to don't apply, e.g. self cert, adverse credit, BTL. Flexible features are something that I would expect to be included in the OP's wish list. Offsetting tends to be more expensive..

If you would expect flexible features to automatically be on someone's shopping list now (ie a minimum requirement for a 'decent' mortgage), would this not support my arguement that developments in the mortgage market may make any mortgage that is done now inflexible or uncompetitive in the future - would someone on a great rate arranged when flexible mortgage were not available that has annually charged interest be happy with being unable to access these features now because they have a tie in?

Future developments could include a 'mega-mortgage' which has been touted. This could include the possibility of a number of different loans (buy to let, main residence, holiday home) all under one account. Total funds available for new properties (which can be offset by savings/current account) would be based on the value and income of the total property portfolio rather than the individual property's value/rental income. There would be one rate and low charges for additional borrowing, making access to money for investment through a portfolio mortgage account available to more people on competitive terms. This may even bring about the 100% LTV Buy to Let Mortgage and the end to different rates for Buy to Let and Residential.

Will someone young with a developing income and lifestyle not benefit from being able to do this if it becomes a reality without having to pay to get out of the 10 year fixed rate deal that looks so attractive now?

dwsjarcmcd wrote:

If all these features are so important, how is it that the Portman's annual interest 'policy' receives so much broker support. Probable answer because they do this to deflate the rate, make it look best buy but the actual cost is more than others with daily interest and a higher rate. Yet many go just for the rate.

As far as I know, Portman do not receive an inordinate amount of Broker support. I would argue that their habit of offering some 'direct only' deals that are guilty of the marketing tricks you describe is evidence that it is 'self arrangers' and not brokers who most often fall for this. Personally, I have arranged only one Portman mortgage in the last 18 months for exaclty the reasons you state - I try to avoid annual interest deals or ones that hide hefty charges. I believe this is evidenced by some of my (and other advisers) posts on here urging people to look at the cost over a period rather than headline rate. Does not mean that people always listen to us though.

dwsjarcmcd wrote:

I also think that the current flat yield curve and interest rates at sub 5% for 5 & 10 years is miles away from the conditions of 12% fixed rates.

True, but at the same time, what happens if we enter the Euro? Tracker rates currently follow the Bank of England Base Rate. Most of them state BBR or equivalent benchmark available at the time. If the Bank of England loss control over interest rates, it would be fair to argue that our Tracker mortgages should following the European Central Bank Rate (currently 2.75% I think). That could mean that the lifetime tracker I have now could go from 4.99% now to 3.24% on entry into the Euro. That would be a drop of 35% - not so different to the drop from 12% to 6% (at 50%) - would your long term fixed rate at 5.09 look attractive then? Obviously it depends on what happens to interest rates, but I take it you understand the point.

dwsjarcmcd wrote:

I also see brokers having sold dollar mortgages a few years ago without understanding the real implications on their customers, which have been massive. Sold because they were cheap, and brokers didn't understand the risks.

I find that a little condascending. I understood exactly what the risks of the US LIBOR mortgages offered by the Skipton and Accord were. Actually, they were being heavily touted by resident amateur experts on a board I frequented at the time, but I only arranged one - and that was for an 'insistent customer'.

dwsjarcmcd wrote:

To the above list you could IFRS, which will arguably have he greatest impact, but does this not add weight to the arguement for using longer term FR's? Again, open to interpretation.

IMO, IFRS will have a lot less influence on the mortgage market than Basel 2, but I think we are in total agreement here - open to interpretation is exactly right - that's why we have to tell customers the downsides of a long term deal with a tie in as well as the good.

dwsjarcmcd wrote:

Quote HWIC: 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.


Many lenders will treat this additional borrowing as a new customer rate. A much bigger concern is the potential for lenders (Halifax alledgedly) to increase the price of remortgages because they can't earn the margin on them because of churn. This could particularly be the case in 2/3 year rates.

I believe you may have missed my point. Although they may offer the customer a 'new customer rate' for any new borrowing(ie over and above the exisiting mortgage, with the exisiting loan retaining it's original terms). That lender's new customer rates may not be the most competitve at the time. Someone who was very competitve 3/4 years ago may only be offering very average deals at the moment. Depending on how much extra you borrow, your average rate could be higher than would be available in the market - an arguement for being able to choose from everyone - even if you do stay with the same lender.

The cost of remortgaging may well increase, but lenders may choose to concentrate on retaining customers - hence the start of very competitive retention products at the moment. This is cheaper than finding and remortgaging new ones, helping margins to be maintained.

Quote HWIC: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.


They may, but there is a good chance that the existing lender, with the payment history will be keen to retain.

Afraid not, current lending limits are significantly more generous than they used to be, but this has brought about an increasing 'computer says no' mentality when it comes to income stretches with some lenders. Frankly, most would rather take the penalty and lose the business rather than jeapordise their 'risk rating' which could affect the price at which they get money (also comes back to Basel 2 again).


Quote HWIC:
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.


Again you could cite millions of such examples but they apply in many other instances i.e existing borrower transfers,

which is why it helps to have as few tie ins as possible (preferably none)

dwsjarcmcd wrote:

I accept the first point but what you have is certainty, what you didn't know was the price of your 3 year deal a year before you bought it. I would suggest that lenders are far from introducing competative retention products, they are wider margin that new products, priced cleverly to deter people from moving.

You just have to look at the lenders that have started doing this in 2006 - Woolwich (some great retention deals), Accord (ditto) to name two.

Even the Halifax has vastly improved their offering to customers (fixed rate at 5.50 ish - regularsaver will know - as opposed to 6.35 one of my customers was offered last year). They are also reported to be about to start offering brokers retention fees - that shows their commitment to retention products in the future.

After all, what do you think is going to happen if Nationwide and First Active carry on with their current media 'new customer only' campaigns?

dwsjarcmcd wrote:

Agreed it may be but then again it may not. My point is that with 5/10 year money at sub 5%, now may be a good time to hedge bets (actually a few months ago would have been better!).

Have never disagreed with you - just saying people have to be aware of the downsides of tying themselves into one lender and one deal for the long term.

Your Intelligent debate is much appreciated and has helped me to address all arguements in my own thoughts - I'll leave it to you to decide where I agree with you and where I agreed with 'HWIC - Mortgage Adviser'