It wasn’t too long ago that five years was viewed as a length of mortgage deal only considered by some of the most conservative or secure borrowers. In today’s mortgage market this is widely seen as being the norm, and even considered to be more common than the historically popular short-term fixed rate deals of two and three years.
So much so that Paragon’s latest Financial Adviser Confidence Tracking (FACT) Index pointed to 49% of all mortgage customers now opting for an initial fixed rate period of five years or more when selecting a mortgage, up from 25% in 2013. Two and three-year fixed rate products recorded a drop in popularity as a result, with two-year fixed rate products falling from 54% of the total in 2013 to 37% in Q1 2019. Three-year fixed rate products were also down from 18% to 12%.
90% of advisers highlighted low interest rates coupled with concerns over future rate rises as the key factors behind the growing popularity of the five-year fix. Customers’ preference for long-term certainty on payments was also cited as important (76% of advisers). Whilst 50% of respondents felt that the increased popularity of the five-year fix was neutral for the mortgage market, 19% felt it could have negative implications.
The growing appetite from borrowers for longer-term deals is also indicative of stronger competition in the lending arena amongst this product type and a fall in homemover numbers during a time of economic and political uncertainty. And with the Bank of England governor Mark Carney recently warning that a modest recovery over the next three years will warrant higher interest rates than financial markets currently expect with inflationary pressures likely to force the central bank to act.
Add this to the fact that many newer homebuyers have known nothing other than historic lows and little base rate activity, and any further speculation could spark even greater demand from borrowers to fix for longer.
Although I do not expect this to impact the 10-year fixed rate market too much as this remains a somewhat niche product, unless additional layers of flexibility can be added to make this more appealing to potential borrowers.
Of course, longer-term deals will not be the right solution for everyone. Lenders and intermediaries should not be ignoring a shorter-term product market which will continue to be attractive and appropriate for those borrowers who are more unsure of their ongoing circumstances.
A combination of factors which only serves to highlight the continued importance of the advice process and how intermediaries need to adapt to market conditions and trends by integrating a more holistic approach when dealing with their clients short, medium and longer-term needs.
Craig Calder is director of mortgages at Barclays