Mortgage lenders see future for long-term fixed rates

New CML research and analysis looking at long-term fixed-rate mortgages suggests that there is a reasonable consumer appetite for such products.

But the costs and constraints of funding the flexible features that would make them more attractive to consumers are likely to continue to constrain their take-up unless the government incentivises them further.

New research commissioned from YouGov by the Council of Mortgage Lenders reveals that 42% of people would choose a fixed rate mortgage if they were choosing a deal now. Only 13% would choose a variable rate, while the rest did not know.

Among those favouring fixed rates, shorter-term deals of up to five years were the majority choice. But 43% of those attracted to fixes would prefer to choose a medium (5-10 year) or long-term (more than 10 year) fixed rate, suggesting a significant minority appetite for these deals.

Among all respondents a quarter said that nothing would induce them to take a longer term (more than 10 years) fix. But significant factors that would encourage many people to choose a long-term fix were peace of mind in case rates go up (cited by 37%) and helping people to manage their household budgets (35%). Providing certainty also featured prominently (27%). Fewer people cited reassurance about borrowing large amounts of money as a factor (16%) - but when asked whether people borrowing large amounts relative to their income should have to take out fixed rate loans to protect themselves against higher monthly payments, a significant majority of those who expressed a view felt that they should.

Significant factors that would discourage people from choosing a long-term fix were losing out if interest rates went down (46%), being locked in to the same lender for a long time (35%), lack of flexibility (27%) and inability or cost of making early repayments (26%). Reassuringly, given that most long-term fixed rate deals are portable and can be transferred if the borrower wants to move house, the factor causing least concern was a perception of not being able to borrow more and/or move house during the period of the fix (12%).

People might be more willing to take long-term fixed rate deals if they believed they could exit them more easily and at lower cost. But the survey showed a fairly ambivalent picture about how consumers thought lenders should price for this. Many respondents did not express a view. Among those who did, the majority preferred a lower upfront mortgage rate with an early repayment charge, rather than an option to redeem without charge with the cost built into the mortgage rate. 44% of respondents said they would be willing to pay up to a tenth more of their monthly mortgage cost to have the freedom to refinance at any time at no additional cost. But the actual level of extra cost that consumers would accept is highly questionable.

Bob Pannell, CML head of research, commented: "In the absence of a major policy intervention from the government, the take up of long-term fixed rates looks set to remain relatively small for the foreseeable future, and the most we are likely to see is some movement from short-term to medium-term fixed rates."

Rob Thomas, CML senior policy adviser, added: "Measures that would trigger really significant demand for long-term fixed rates are potentially controversial or costly. But mortgage lenders' willingness to innovate in this product area suggests that they will be more than happy to meet such demand if it arrives."