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The long-term view

Brokers say lenders should incentivise borrowers into fixing mortgage interest rates for the long term

Leeds Building Society last week became the first lender to launch a 10-year fixed-rate mortgage through the Help to Buy equity loan scheme.

It has launched the product with Barratt Developments with a rate of 4.99 per cent at up to 95 per cent loan to value. It has a £199 booking fee and £300 completion fee.

At the same time, the lender launched a 10-year deal as part of its Welcome Mortgage range, allowing borrowers to defer interest payments for up to six months. Data from Moneyfacts.co.uk shows just four 10-year fixed rates were available in the market as of 2011, rising to 11 in 2012. This rose to 25 in 2013 and as of 7 May there were 20 10-year deals available.

‘No mass market’

In November last year, Legal & General shelved plans to launch a specialist mortgage-lending arm focused on longer-term fixed-rate deals, with the lender saying it could not see a “mass market” for such products.

However, brokers disagree, saying there should be competition in the longer-term fixed rate market. They also suggest now is the time for borrowers to take advantage of the
opportunity to lock into a low fixed rate for longer, given base rate can only go one way. 

Lock-in rates option

Trinity Financial product and communications manager Aaron Strutt says: “Most borrowers at the moment are looking to fix for two and five years but a healthy portion of those would no doubt lock in for 10 years if more of them were available. The problem is lenders do not offer a huge amount of these deals.”

Perception Finance managing director David Sheppard says: “There should be more longer-term products as long as the overall package makes sense. In many cases it is the best option for clients to lock in their rates for that peace of mind.”

There is a stumbling block though – early repayment charges. Strutt says often longer-term deals require a bigger fee and a large ERC.

He says: “A lot of people are not prepared to pay that premium. I think lenders could look to innovate in terms of what incentives they offer borrowers to lock in for longer terms.”

The 10-year Leeds product comes with a 6 per cent ERC for the first two years, 5 per cent between three to six years, 4 per cent between seven to eight years, 3 per cent in year nine and 2 per cent in year 10. 

John Charcol senior technical manager Ray Boulger says the main reason more borrowers do not take up long-term fixed mortgages is a fear of being stuck for that length of time.

Boulger says: “Most people are very nervous about being locked into their mortgages for such a long period of time and having to pay a hefty ERC to get out of them.

“The obvious solution to that would be to apply ERCs for a shorter period, which some lenders have done in the past.”

Innovative solutions

The Cheshire Building Society, now part of Nationwide, previously offered a 25-year fixed rate deal in which borrowers faced ERCs for the first five years. After that period, the redemption charges were only applied every other year.

Boulger says this shows lenders can offer innovative solutions without the greater risk of borrowers paying off their mortgage early.

He says: “There is an opportunity for lenders to offer a fixed rate for five or ten years with no ERCs. The quid pro quo would be they might well charge a slightly higher rate, which offsets the cost of a borrower repaying early.

“However, I still believe people would pay that premium for the freedom of being able to move at any time without having to pay the ERC. That would be particularly true for a 10-year fix.”

Brokers say lenders should take a proactive approach to incentivising customers into long-term deals.

Sheppard says: “We obviously need the deals to be attractive in themselves because a five-year rate that is 1.5 per cent cheaper than a 10-year rate is always going to be more attractive but we also need a sensible view on ERCs.

“Where is the incentive to attract a client to fixing for 10 years, if the ERCs are the same as a cheaper five-year deal?”

Boulger says: “The way to market a 10-year deal is to offer a rate that is a reasonable but not prohibitive margin above five-year rates, that either has no ERCs.

“Alternatively, a lender could say that after five years it will remove any charges for redeeming. It is a simple tactic.

“The two considerations for a borrower when looking at these deals revolve around interest rates, which of course you can do little about, and whether the ERCs are acceptable. That is a tool lenders can use and be innovative with to get more people locking in to long-term rates.”

‘Common-sense view’

Sheppard says lenders should be encouraged to take a “common-sense view” on ERCs, particularly when they are already charging a higher rate on long-term fixes. 

He adds: “Lenders should give borrowers the freedom they require by taking away the charges or offering repayment windows.

“It is clear there is a market for these kind of deals.”

Top 5: 75% LTV 10-year Fixed Rate Deals
Lender Initial Rate Standard Variable Rate Fee ERC
Yorkshire Building Society 4.14% 4.99% £0 7% – 1% 
Norwich & Peterborough 4.19% 4.99% £0 7% – 1%
Leeds Building Society 4.49% 5.69% £1,800 7% – 1%
Britannia 5.49% 4.74% £999 6% – 2%
Co-op Bank 5.49% 4.74% £999 6% – 2%

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