As more high street lenders offer low mortgage rates for five-year fixed terms, advisers and mortgage brokers are keen to highlight the pitfalls that come with such deals.
The lowest rate for a five-year fixed term deal currently stands at 1.14 per cent, the lowest it has been since financial data collector Moneyfacts’ records began back in 2007.
With government initiatives such as the stamp duty holiday coming to an end this month, lenders are wary they need to keep up the momentum surrounding their mortgage products.
But despite rock bottom rates, advisers say borrowers still are not warming to five-year fixed rate products.
“We are still seeing far greater interest in shorter-term products,” said Chris Sykes, a mortgage consultant and associate director at Private Finance, referencing two and three-year mortgages.
Whilst five-year fixed rate mortgages are more mid-term than long-term products, Sykes told FTAdviser: "Seven and ten-year fixed rates exist and would be considered the long term product by many, [but] they have an incredibly low take up.
"First of all, not many people can predict their lives that far into the future, and also they come at such a rate premium that it is very unattractive to many."
As for the slow uptake of five-year mortgages, Sykes put this down to “the lack of flexibility from lenders and not enough product innovation".
Colin Bell, co-founder and COO at new digital lender Perenna, agreed that "there hasn’t been product innovation in the UK mortgage market in a long time".
He added: "Tweaking rates isn’t product innovation." Bell cited structural change as the solution to UK borrowers' avoidance of longer-term fixed rates.
Perenna is in the process of developing a suite of long-term mortgage products which will be issued alongside a 30-year bond to offer more flexibility. Banks in the UK currently fund 30-year mortgages with deposits.
In the last two years, Moneyfacts data shows, the number of five-year mortgage products at a 95 per cent loan-to-value on the market today has declined 32 per cent.
"If we're talking about five-year fixed mortgages, they aren’t that flexible as common practice," Rachel Springall, a finance expert at Moneyfacts, told FTAdviser.
Sykes thinks providers should offer “reduced early redemption charges on longer term products” as well as “flexible, fixed longer-term rates with no early repayment charges (ERCs) at all, albeit at a slight premium”.
“There have been some products like this historically,” said Sykes. “However these products have always come at such a premium as to be unattractive for the majority of borrowers."
At £1,075, the average fee currently charged on a fixed-rate mortgage deal has increased by £57 year-on-year, according to Moneyfacts data released this week.
And the proportion of the market offering fixed rate mortgage deals that do not charge a fee has reduced from 40 per cent in June 2020 to 35 per cent at the start of this month.
"The biggest fee to take into account with longer term fixed mortgages is often the ERC fee," said Kevin Dunn, co-founder and senior adviser at Furnley House.
He continued: "If clients want flexibility to have the whole of the market available if they move, or want to sell their property and repay the mortgage, long term mortgages with their excessive ERCs, may not be suitable."
Whilst the hefty fees are partly to blame for the slow uptake, Sykes also pointed to the “paradigm shifts in society” following the pandemic.
“Borrowers are not prepared to commit to longer terms even if it is in their best interests in terms of cost efficiencies on account of the fact they are wary of what could happen.”
Bell thinks first-time buyers fit these longer-term mortgages and are willing to sign up, but that regulator tests on rate volatility are what fences such borrowers.
He said: "You have to ask: 'Can you afford it at 3 per cent? But can you also afford it at 7 per cent?' That’s why buyers can’t get on the ladder."
Five-year fixed-rate mortgages are not the only products undergoing significant rate cuts. HSBC and Nationwide are some of the latest lenders to offer mortgage rates below 1 per cent on two-year fixed-rate products. Some have already dubbed the rush to sub-1 per cent levels a "rate war".
But as Karen Noye, a mortgage expert at Quilter, highlighted: “New and competitive deals will help drum up business for the lenders and keep customers coming through the door.”
Rather than products designed to help borrowers, Noye explained these mortgages were more a reflection of lenders’ worries over “government schemes designed to keep the housing market afloat during the pandemic” ending.
And whilst shorter term mortgage deals are seemingly more popular, they also come with their own drawbacks.
“These rates are not all they seem,” said Sykes. “In actual fact, [they’re] only available to the highest quality of clients, for instance those with an absolutely perfect credit score and a loan-to-vale of 60 per cent or lower.”
ruby.hinchliffe@ft.com
