Levelling Up Secretary, Michael Gove MP, recently voiced his support for 25-year fixed-rate mortgages, emphasising their potential to address the uncertainties associated with frequent remortgaging.
Gove cited Canada’s common use of long-term fixed rates as an example, suggesting the UK should explore similar products to provide borrowers with more certainty.
While opinion on the viability of a 25-year product in the UK is still divided, Gove’s comments have ignited discussions on the potential of longer-term fixes. The recent sharp rise in the Bank of England Base Rate (BBR) may have led many borrowers, especially those experiencing rate increases, to consider preparing for similar scenarios in the future.
As the turbulent market stabilises and BBR eventually decreases, borrowers may increasingly look to longer-term fixes to mitigate the risk of sudden base rate movements, and this is something we expect to widen the appeal of second-charge mortgages further.
Currently, five-year fixed-rate mortgages are the preferred choice for many borrowers, with 50% of all mortgage products being taken on this basis in May, according to the latest LMS Remortgage Snapshot.
Despite the increased base rate and high cost of five-year fixed rates, the fact that half of all fixed rates were taken out on this basis is testament to the popularity of such deals and the desire of homeowners to lock in and have some guarantee over their future payments.
The decreasing prices of five-year fixed rates over the past decade has contributed to their rising popularity, with the trend towards five-year fixes having had far-reaching consequences for advisers and borrowers. It has also boosted the popularity of the second-charge mortgage market, as those tied into competitive long-term deals look to raise additional funds.
While a 25-year fix may require a significant mindset shift from borrowers, a ten-year fix may be more attainable and appealing, and could become a growth area for lenders.
We have already seen some innovation from mortgage lenders in terms of longer-term fixed rates, with a handful of 40-year fixed rates having been launched in recent years.
If there is a shift towards longer-term fixes, it may present challenges for mortgage advisers however. Yet, offering second charges could serve as an alternative revenue stream, particularly for borrowers already committed to fixed-rate deals who unexpectedly require additional funds due to changing life circumstances.
Borrowers on competitive fixed-rate deals may be hesitant to disturb them, as they risk incurring Early Repayment Charges or higher costs. In the near-term we may see borrowers migrate towards two-year fixed products in the hope that by the time they remortgage again, rates will have come down.
Even so, we expect demand for second charges to remain strong, if not increase over the near and medium-term. This will be driven by a push towards long-term fixed rate mortgages alongside increased demand from borrowers who may wish to consolidate debt.
The latest Money & Credit data from the Bank of England offers an interesting insight into borrowers’ finances. Although consumer borrowing actually decreased from £1.5bn in April to £1.1bn in May, the annual growth rate for all consumer credit still stood at 7.5% in May.
The drop off in consumer borrowing might be explained by the amount households withdrew from banks and building societies during the month. At £4.6bn this was the highest level of household withdrawals on record and with savings rates high at the moment, this could be a telling sign that borrowers are turning to emergency funds.
Given the interest rate on interest-charging overdrafts stood at 21.78% in May, with the interest rate on credit cards rising to a record high of 20.44%, borrowers will be doing all they can to avoid rising rates.
With a push towards longer-term fixes potentially on the horizon and the ongoing escalating level of borrower debt, we feel second charge mortgages will continue to play a vital role helping advisers and their clients in a changing market.
Susan Baldwin is interim head of lending at Evolution Money
