Head to Head: Should the UK offer lifetime fixed-rate mortgages?

YAY

Peter Izard, business development manager, Investec Private Bank

The simple answer to this question in my opinion has to be yes. As a consumer, a mortgage will almost certainly be the single most expensive commitment of your lifetime, so if the option were made available to you, why would you not consider fixing your rate for the life of your product?

Given that this is extremely rare in the market, let me explain how beneficial this would be.

The UK mortgage market is one of the most competitive and diverse in the world. The huge choice of providers ensures that rates remain competitive with the number of options increasing with varying criteria. Even underserved elements of the market are now seeing more options.

Fixed rates are, of course, a staple of the market today, with rates of up to 10 years gaining in popularity.

However, the issue with longer-term fixed rates has always been the high early repayment charges, made worse through not all loans being portable.

A successful lifetime fixed-rate mortgage would therefore need a competitive rate, albeit one that is slightly higher to offset costs for the lender, with no early repayment charges.

Consumers would then have the security that their interest rate will remain consistent for the life of their mortgage term, providing maximum flexibility to meet their changing financial requirements – and of course the portability issue is removed as there are no early repayment charges.

This is commonplace in the US market, and if implemented in the UK, I believe it would be very successful.

The way this would be funded by lenders is, of course, more problematic and is most likely why we so rarely see it offered in the UK. However, with more lenders entering the mortgage market and competition increasing, we may well see more innovation in this area.

However, where lifetime mortgages are rare, there is still opportunity for long-term fixed-rate products. At Investec we offer a 10-year fix, which is very popular among clients, so there is appetite for longer-term certainty in this area.

NAY

David Baker, managing director, Lift-Financial

In the current uncertain economic climate, clients are increasingly asking for lifetime mortgages. These products are especially popular with clients from mainland Europe, where they are readily available.

Without seeing the finer details of these products, it is hard to give a definitive answer – but in general I would approach these products with caution. The general feeling from clients I speak to daily in the City is that rates are low and therefore fixing for the long term now makes sense.

However, as always, the devil is in the detail and this is where a good broker can add value for a client. Of course, the Bank of England base rate must increase at some point so I can see the attraction of securing a long-term product now.

However, lifetime products come with long-term penalties for breaking these deals before the product end date, due to the way they are funded.

Clients often ask if the mortgage is portable, which with any high street lender, it generally is. But clients need to understand that porting (the process of moving a mortgage from one home to another during a fixed period) is an option rather than a guarantee from a lender.

What if your lender does a survey and does not wish to lend against the new property, or the surveyor confirms a lower value than you had planned to pay?

What if your current lender does not want to lend the amount you wanted to borrow?
What if you breach the current lender’s maximum LTV brackets, and they simply do not have a product to offer? Joint clients can separate or go through changes in circumstances beyond their control.

These and many other reasons will result in the need to trigger an early repayment charge if you wish to proceed with a new lender to buy the new property. If you can say with a strong degree of certainty you have no plans to move again, then I can see the attraction of a long fixed-rate mortgage, but if you are unsure of your long-term plans, then I would be reluctant to see a client take this option.

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