Fixed vs variable, shorter vs longer term. What mortgage product is best? This is a question we often hear, and whilst the question may seem simple, we explore how the answer can be far more complex.
When advising clients on mortgage options, one of the primary considerations is the duration of the mortgage product itself, distinct from the overall mortgage term. Mortgage products typically span various timeframes, such as 2 years, 5 years, or 10 years, each requiring periodic review throughout the mortgage term. For instance, if a client opts for a 30-year mortgage but consistently selects 2-year products, they will likely need to review their mortgage 15 times during its lifespan.
Predicting the ideal product length is challenging due to unpredictable rate movements and changes in a client's circumstances, such as relocation, family growth, or career shifts. However, based on market trends and client behaviour, certain patterns emerge. For instance, clients planning to move within a few years may benefit from shorter-term products like 2-year ones, while those seeking long-term stability may find 5 or 10-year products more suitable.
Price is another significant factor influencing product selection. Historically, shorter-term products tended to offer lower interest rates. However, in recent times, longer-term products, notably 5-year ones, have become more affordable, prompting many clients to opt for them due to financial constraints caused by the cost-of-living crisis.
The choice between fixed and variable/tracker products is another crucial consideration. Fixed-rate products offer payment certainty for a predetermined period, facilitating budget planning. However, they may entail penalties for early termination if the client's circumstances change. Variable or tracker products, on the other hand, provide flexibility and typically come with reduced penalties or even none. While they expose clients to interest rate fluctuations, some may prefer them for the potential to benefit from rate decreases.
While predicting interest rate movements is uncertain, informed decisions can be made based on near-to-medium-term plans. In residential lending, prioritising stability is often recommended, considering the property as a home rather than an investment. Conversely, in buy-to-let lending, where risk tolerance may be higher, clients might opt for more adventurous strategies, provided they don't compromise their ability to afford residential ownership. Ultimately, clients should weigh the trade-offs between stability and flexibility to make well-informed decisions aligned with their financial goals.
At Capital Private Finance we provide tailored advice on an individual basis, as there is no one size fits all product. Due to the size of the market and factors to consider as discussed above it can become very challenging for clients to navigate unless guided by an expert. By looking at a clients circumstances our expert advisers will be able to determine what is likely to be the best solution and make a recommendation accordingly.
Author:
Amit Gupta
Regional Financial Services Manager, Capital Private Finance
