Written by Colin Bell, Founder and Chief Operating Officer of Perenna
The Bank of England’s recent scrutiny of the mortgage market, which highlighted brokers’ propensity for recommending short-term fixed rate mortgages, has sparked a debate that touches on the very foundations of the UK’s mortgage industry. It’s true that short-term fixes are prevalent, but the issue is not a matter of broker practices, rather it is indicative of a systemic flaw within the UK mortgage market.
The UK’s funding model is unique in its encouragement of short-termism. Unlike many international counterparts, where long-term fixed-rate mortgages are the norm, the UK market is an outlier being funded by deposits. This model exposes borrowers to significant interest rate risks on what is typically their largest financial commitment. As interest rates fluctuate, as has been so prevalent in recent years, so too do mortgage rates, leaving homeowners vulnerable to financial instability, and payment shocks.
This short-term focus is increasingly hard to justify given the demographic and societal changes we are witnessing. With an ageing population and a growing affordability crisis, the need for stability and predictability in mortgage payments has never been greater.
Yet, the UK mortgage model has not evolved. Historically, brokers have faced a trade-off when considering longer-term products for their clients. Longer term fixed-rate mortgages often came with equally long early repayment charges (ERCs) or other features that penalised or caused a lack of flexibility for borrowers. This has understandably led to a reluctance among brokers to recommend such products.
This manifested most notably in the period between 2013 and 2020, during which both interest rates and mortgage rates were at historic lows. Holding everything else constant, you would have expected more people to want to lock in rates for as long as possible to guarantee low payments. Even though both brokers and consumers could see the benefit of such a strategy in theory, there simply weren’t the right products available that would make this worth it.
We are now in a very different set of financial circumstances, but yet again we are taking a short-term view. We need to promote innovation in the market to prevent such a short-term outlook taking hold for good.
Embracing alternative models to present a much broader range of options, from 0% deposit mortgages to long-term fixed rate solutions that safely meet modern consumer demand, is critical if we are going to improve affordability and lead the UK back to a state in which home ownership is not only preferable, but realistic.
The current situation should serve as a wake-up call for the Bank of England and the Financial Conduct Authority (FCA). Reviewing current regulation will enable lenders to explore and develop their mortgage products, introducing greater choice in the market and equipping brokers with the tools needed to have more rewarding conversations with clients.
The Bank of England’s report indirectly highlights the prevalence of short-term fixed rate mortgages, however this is not an issue with broker advice. Brokers have a duty to their customer to secure the best possible deal for them.
What we must do is create the environment that equips brokers with the widest range of products available that are attractive to their clients. Reviewing the current regulation that stifles the market would be a huge step in the right direction. By taking a long-term view and embracing new products, we can better serve the needs of homeowners and contribute to a more resilient and equitable mortgage market. Brokers are not the problem; they are part of the solution and can help restore the UK to a nation of secure, satisfied homeowners.
Also consumer education and awareness are very necessary – the time when consumers understand the risks of short term fixes is the time when they can make informed choices. Cheap is not always best if it comes with risk, stability may be more important. Countries that have long term fixed rate in their DNA do not worry about interest rates so much, it has much less of an impact. The UK does not have that DNA yet, but Perenna is working on the education point.
