In today’s volatile market, first time buyers face a constant uphill battle buying their first home. The dream of homeownership seems out of reach for many.
First time buyers are constrained by the design of traditional mortgage products
Despite the government’s recently announced extension to the mortgage guarantee scheme in its Autumn Statement, more support is needed for first time buyers.
While market commentators focus on short-term teaser mortgage rates, which give the impression of improved housing affordability, this is not the case.
The reversion rate determines affordability, typically the standard variable rate (SVR), which then dictates a lender’s stress requirements. Because of this, the amount a borrower could receive is reduced and usually by a significant amount.
Regulation also plays a part. The loan-to-income (LTI) flow limit set by the Financial Policy Committee, whilst good intentioned, also impacts first time buyers becoming homeowners.
Additionally, the traditional mortgage products on offer place all the risk onto the borrower by design – a short-term fixed rate reverting to a high rate that is set by the lender. Uncertainty in your biggest financial commitment is no way to start your homeownership experience.
Empowering borrowers
Here is where flexible long-term fixed rate mortgages offer a solution to first time buyers, by providing improved affordability, stability, and flexibility. These mortgages are empowering borrowers and give them control over the financial element of their lives.
Long-term fixed-rate mortgages do not need to be ‘stress tested’ as the rate is fixed for the whole term. As a result, homeowners could borrow more when compared with leading high street offerings.
In some instances, this could be the difference between buying a two bed or a three-bed home, or between a home and no home.
Financial stability is vital for those at the beginning of their homeownership journey, and long-term fixed rates provide homeowners with consistent mortgage payments over the entire term. Borrowers have peace of mind that if interest rates spike due to market shocks their monthly repayment rate would remain unchanged – providing peace of mind to homeowners.
As flexible long-term fixed rate mortgages now come with short early repayment charges (no longer than five years typically), borrowers are not tied in. This is a contract that is in the favour of the customer, not the lender.
Also, given there is no risk of payments increasing, people could borrow more than the LTI flow limit regulation allows for – 4.49 times – responsibly.
UK availability
Despite the clear advantages, flexible long-term fixed rate mortgages are not yet the norm in the UK. This is partly due to a cultural attachment to shorter-term fixed rate products and a lack of availability of other mortgage types.
Long-term fixed rate mortgages are, however, the norm in the US and European markets, such as Denmark, Germany and the Netherlands.
Brokers play a pivotal role in advising customers on suitable mortgage products, and this role will receive even more scrutiny with the introduction of Consumer Duty. It is important that all available mortgage options and products are on the table for their customers.
Brokers can help their customers by equipping them with the knowledge and tools needed to educate them about the long-term financial planning benefits and security these products offer.
The appeal of lower initial rates offered by short-term fixed rate products can be tempting, but it’s important to consider the long-term financial implications. No one can predict the future.
Flexibility for customers
Brokers therefore should consider whether they are presenting customers with mortgage products which provide stability and importantly flexibility to change when it suits the customer.
For long-term fixed rate mortgages to become the norm in the UK, a concerted effort is needed from all stakeholders. Lenders need to provide a wider range of mortgage options to customers.
Brokers must be proactive in educating themselves and their customers about the advantages of flexible long-term fixed rate mortgages, and borrowers must be aware of the long-term implications of their mortgage choices.
The government and regulators should also consider the benefits of fostering a market for long-term fixed rate mortgages, which will support many more first-time buyers onto the housing ladder than ever before. This includes providing an exemption for long-term fixed rate mortgage from the LTI flow limit.
The journey to homeownership doesn’t need to be a challenge for first-time buyers. By accepting long-term fixed rate mortgages, we can herald in a golden age of homeownership, and create a nation of happy homeowners.
Arjan Verbeek is chief executive and co-founder of Perenna
