Lenders have huge appetite for long-term fixed rates, but hurdles remain, experts say
Insurers and pension funds have an appetite for longer-term fixed rates, but barriers around broker compensation, cultural preference for short-term fixed rates and regulation remain.
Speaking on a panel at Deal Catalyst’s UK mortgage finance investor conference, Simon Webb, managing director of capital markets and finance at LiveMore, said insurers and funds pension funds had a “huge appetite” for lifetime fixed products, particularly in the equity release. .
The company, which has been lending for about two years, offers fixed-for-life products to people aged 50 and over.
He added that with respect to life-only fixed interest products for retirement, there were “interest tiers”, but as it was a newer product and there were had affordability considerations, long-term investors “always focused on the product”.
Webb added that a “big challenge” was the interest rate environment, with rates expected to rise for at least a year. He said it raised the question of whether “the boat had been missed in terms of locking for a long time at a low rate”.
He continued that there was a “cultural challenge” as UK consumers were not used to subscribing to a long-term fixed rate, traditionally opting for fixed rates over two or five years, and that it would take a “big chunk of education”. for consumers.
Webb noted that there were a lot of benefits, especially for older customers, as it gave them the security of fixed payments for a longer period.
He said the market was “evolving”, pointing to an increase in 10-year fixed rate products as well as the launch of longer-term lender Perenna.
Brokerage fees, short-term preference and regulation are barriers
McClelland said that as an “affordable lender focused on first-time buyers” the lifetime fixed rate would be an “interesting product.”
However, he said there are three main barriers to adopting long-term fixed rates, one of which is broker compensation.
McClelland said brokers are typically paid 40 basis points as a processing fee, and “selling a lifetime fix is tough unless you change your approach.”
This could mean tying litigation costs to the rate rather than the amount of the mortgage.
He agreed with Webb that there was also a cultural challenge to long-term fixed rates, noting that people expected to move in about two or three years. However, he said, in reality, the average time between moves is more like 15 years.
The last obstacle concerned the product and the regulations. He said that due to mortgage affordability rules, lenders could not take into account future income or the potential for future income, which had an impact on prices.
“It has to be competitive. You have to give them the flexibility to take that mortgage with them if they move or allow them to pay it off if circumstances change without huge penalties, and then trying to marry that off for the lenders becomes difficult.
“So I think there is a world in which a product would work, but there are a lot of obstacles to making it happen,” McClelland explained.
Consumer Duty could focus on long-term fixed rates
Peter Beaumont, managing director of The Mortgage Lender, noted that his firm was also “looking closely” at longer-term fixed rates and that with the current economic environment and improving product design, they were much more attractive than before.
He said: “If it’s going to happen, we’re probably close to doing it because the product design is so much better than it was.
“You build all the flexibility into these products that the consumer wants. Relative value is better now because they were very expensive at one point, and we have an inverted yield curve right now, which also helps. »
He said Consumer Duty, which is a new regulation from the Financial Conduct Authority, could contribute to the proliferation of long-term fixed rates.
“Consumer Duty will focus on fair value for customers and ensure the broker meets needs not just now, but also in the future. It could also contribute to the proliferation of longer-term fixed rates. »