When it comes to choosing a mortgage, UK customers are often faced with the dilemma of deciding how long to fix their rate for.
Short term products like two-year fixes typically offer the best rates, but buyers choosing this option will also need to remortgage more frequently.
That brings recurring costs including product and advice fees for customers, but it also means they are more open to future price rises if rates increase.
The other issue is if you are forced to remortgage at a time that may not be right for you or the market, you could end up stuck on a Standard Variable Rate (SVR) or locking into a poor product.
Current longer fixed rate products such as 10 or 15 years are very inflexible, with very high and long redemption charges.
This trade-off in fees and interest rates makes the mortgage process a bit of a juggling act.
Borrowers have to balance affordability and flexibility with certainty, and it can result in borrowers choosing whichever mortgage is easiest for them to access, rather than taking the time to find the one which best suits their circumstances.
In reality, if people were asked to describe their perfect mortgage most would say they would like a single, affordable rate for the lifetime of the loan, and one that got them the amount they wanted to borrow.
This would mean they could guarantee their monthly repayments and avoid the need to refinance every two or five years.
Their ideal mortgage would give them certainty over their future repayments, and also provide the option to switch to another product freely should a better rate become available.
In other parts of the world, this is not far from reality. From Denmark to the USA, homeowners have access to long-term fixed-rate mortgages with rates fixed for 30 years and in some cases even longer.
Many of these mortgages also have the same flexible product criteria that is available with the shorter-term products we know well in the UK, meaning borrowers can switch easily and affordably.
At Perenna, we think there is a place for fixed-for-life mortgage in the UK and we plan to begin offering these products from late summer 2021 subject to receiving our banking license from the Prudential Regulation Authority.
Fixing for life provides more certainty
Certainty over repayments is a key consideration for borrowers. No one can really predict where rates will be in two or five years’ time – prices can always go up or down.
A borrower looking for a 60% loan-to-value product who remortgages today might expect to pay around 1.5% to 2% on a five-year fixed-rate mortgage.
However, in five years’ time – when they need to look at another fixed rate – the cost of the same type of product might have jumped to 3.5% or even more. In real terms, this would mean a sharp increase in monthly repayments; leaving less cash to pay for the lifestyle they want to live.
Long-term fix-rate mortgages like those offered in Demark or the USA protect against rate increases like this by giving borrowers a set rate for the lifetime of their loan.
This means they know exactly how much they need to repay every month and they have the reassurance that this won’t change either, even if rates rise.
As a result, borrowers can more accurately plan their finances and budget for other life events, like weddings, landmark birthdays, or having children.
Remortgaging could be a choice, not a necessity
Long-term fixed-rate mortgages also allow homeowners to do away with the need to repeatedly refinance. This has the power to help them save time and money.
If a borrower opts for a two-year fixed-rate product, they may need to refinance more than ten times over the lifetime of their loan.
This not only takes up time, but it could cost them thousands of pounds in product and other fees, add these fees to your two-year fixed rate and it can move the rate by well over 1%. But if borrowers could fix into a low rate for 20 or 30 years, all this can be avoided.
Fixing for the long-term doesn’t have to remove the option to remortgage altogether though. Perenna mortgages will come with an early repayment charge for only the first five years, just like a five-year fixed-rate mortgage has.
It will also be possible to port the mortgage, meaning that borrowers an bring it with them when they decide to move.
Removing barriers to homeownership
Long-term fixed-rate mortgages even have the power to do much more than help current homeowners. They could even help a new generation of people to step onto the housing ladder.
Unlike short-term mortgage products which leave buyers susceptible to future price increases, fixed for life mortgages give buyers much more protection over their predicted repayments.
This has the benefit of helping to minimise the level of stress testing that mortgage lenders need to complete to certify that a person can comfortably afford their mortgage, this interest rate stress testing if often at 7% and reduces the amount customers can borrow.
With the added protection of a long-term fix, those looking to step onto the housing ladder can do so more readily and are even likely to gain access to a loan amount which helps them to buy the property they really want.
Fixing your mortgage rate for 20 or 30 years could seem like an alien concept for borrowers in the UK, however it is the product of choice in many other countries.
Often, it’s the misconceptions that surround these mortgage products – like the idea that they can make it difficult to move to a different product – which put consumers off.
But that’s now changing as long-term fixes now offer certainty and flexibility for consumers, helping these mortgages to become a go-to choice for Britain’s borrowers.
Colin Bell is COO and co-founder of Perenna
Perenna aims to bring fixed for life mortgages to the UK from late summer 2021. Its mortgages will allow borrowers to fix their mortgage rate for as long as 30 years and provide the option to switch to a new product free of charge after five years. Borrowers will have access to up to 95% borrowing. Anyone who wants to be the first to know about these new mortgages can join Perenna’s waiting list here.
You can read more about the pros and cons of and the alternatives to ‘fixed for life’ mortgage products here.
