A friend of mine is prone to occasionally trying his hand at stand-up comedy.
One of his better ‘bits’ involves him going into a book-shop, going up to the counter and asking to order a book.
To which the bookseller replies, “Well, you have to buy the book first.”
My friend replies, “But, I’d like to look at the book first, before I decide to buy it.”
The bookseller says, “Sorry, I can’t order the book until you pay for the book.”
My friend says, “Well I don’t know if I want to buy the book, before I see the book…”
And the bookseller says, “Well I can’t order it until you pay for it…”
My friend says, “But I don’t want to pay for the book, until I’ve seen the book…”
And the bookseller says, “That’s the rules, I can’t order the book, until you’ve paid for the book…”
My friend then turns to the audience and says, “So I still haven’t read Catch-22.”
I suppose you had to be there but the point is that, in my opinion, the same argument could be had with your clients about longer-term fixed-rate mortgages. And, especially in the current environment, this is a much more pertinent issue to raise because borrowers – whether residential or buy-to-let – are looking for longer-term certainty around their monthly mortgage payments, but do they want to pay more and do they want to pay charges to get out of the deal should they need to?
Historically that’s not the culture of the UK mortgage borrower and the reason why mortgage lenders don’t tend to shift a lot of longer-term deals – I’m talking five years-plus – is because, while the certainty is attractive, the rates tend to be more expensive, plus they come with long-term ERCs, and they don’t provide a great deal of flexibility should the borrower’s circumstances change during the term of the deal. And very often, people’s circumstances can change, and change significantly.
So there is always a pay-off and a compromise, and as Professor David Miles found out when he carried out his study on the feasibility of longer-term fixed-rate mortgages 15 years ago, this tends to be why longer-term deals don’t fly off the shelves. Borrowers want the cheapest rates, they would like longer-term certainty but they prefer to pay less over the short-term plus they’re put off by the penalties that come with longer-term products. Lenders have pretty much been unable to square this circle, which is why the shorter-term deal tends to be the prevailing choice.
However, in the buy-to-let sector, we’ve seen a rather different approach recently and with the PRA regulations, for example, we’ve seen landlords increasingly opting for five-year fixed-rate deals because (predominantly) they sit outside the regulations but landlords are also willing to pay a bit more for longer-term mortgage payment certainty. Would they still want the certainty and the option to change at some point in the future without penalty, should they wish to? Of course, and the good news is that it can be done.
We’ve recently launched a ‘Fix to Flex’ product, applying the best of both worlds approach. It’s essentially a five-year fixed rate buy-to-let product with only a three-year ERC ‘overhang’ – the client would pay an ERC in years one to three but after this, there’s no penalty for exiting the deal. We think this marries up the needs of the borrower, with the needs of the lender and given no-one is quite sure what might happen – politically at least – over the next few months, let alone the next few years, we believe there is a lot of landlord demand for this. Add in a competitive rate and the fact that it’s not just open for individual borrowers but also those purchasing/refinancing through limited companies and we think there could be plenty of mileage here.
It would appear that mortgage Catch-22s like this can be overcome; you just have to rewrite the book in order to achieve it.
Jeff Knight is director of marketing at Foundation Home Loans