Help clients plan for the future ­by discussing all the options – Mortgage Strategy

Colin Bell, co-founder and chief operating officer, Perenna

We can’t predict the future, but it’s important we protect ourselves from it — after all, it’s where we’ll spend the rest of our lives! That’s why it’s imperative to consider all mortgage options when talking to clients.

In the current structure of the UK mortgage market, short-term products prevail, meaning borrowers are constantly navigating interest rate risk.

Of course, for some, a short-term solution may be perfect for their needs. But, for other homeowners, as we’ve seen recently, this short-term gamble can cause a lot of pain.

Borrowers may not know about 40-year fixed-rate mortgages unless you mention them

And it doesn’t stop at homeowners. In fact, research carried out on behalf of Perenna indicates around half of those looking to get onto the property ladder are making major sacrifices and lifestyle changes, putting off key milestones like getting married or starting a family, as they try to save up for a deposit.

Do we really think this is the best outcome for the borrower? Is it right that a mortgage dictates your life?

Consumer Duty

The landscape of mortgages is evolving, and with it, the approach to mortgage advice has undergone a transformative shift.

During 2023 we saw the introduction of Consumer Duty to justify our actions and prioritise fairness and positive outcomes to mitigate foreseeable harm. At Perenna, we embrace this evolution, recognising Consumer Duty as both a guide and an ally in shaping our product concepts.

Advisers have a duty to present a range of options and enable a genuine discussion about risk appetite

Elon Musk said, “Some people don’t like change, but you need to embrace change if the alternative is disaster” — something that resonates deeply in this context.

Consider a scenario where a client asks for a ‘cheap’ mortgage to provide a home for their family. Do they really mean ‘cheap’, or do they mean they want to be able to manage their finances predictably? Advisers might recommend a short-term fixed-rate mortgage for its perceived stability and affordability during those first two to three years.

However, unforeseen events such as divorce, pandemics, rates shooting up or products being withdrawn can dramatically alter one’s ability to manage mortgage changes; and, as a result, may force borrowers onto less favourable standard variable rates. Is this avoidable?

Presenting the options

Every client is different. They all have their individual circumstances and varying wants and needs. But the importance of presenting choice remains.

It’s our duty to understand exactly what is important to our customers right now, and in the future, and recommending a mortgage product that’s based on these facts can help mitigate against foreseeable harm.

For some homeowners, as we’ve seen recently, a short-term gamble can cause a lot of pain

That’s why it’s important to present all options. In a market that has favoured short-term lending for such a long time, borrowers may not have considered a flexible, long-term fixed-rate mortgage before. But does that mean it’s not right for them?

The benefit of these products is they can allow clients to control when they remortgage, whether that’s based on improved circumstances or better rates. Essentially the borrower decides if or when is right for them.

The future

For advisers, networks and compliance functions, the ask is clear: discuss all options and allow informed choices.

Undoubtedly, borrowers will request the ‘cheapest’ mortgage. But the stakes of predicting the future incorrectly are high. This demands a deep understanding of the borrower’s true needs — balancing initial costs against stability, long-term expenses, flexibility and overall satisfaction.

Predicting interest rates is an uncertain endeavour. Just as countries shield themselves from interest rate risk, individuals should also have protections in place. Advisers have a duty to present a range of options and enable a genuine discussion about risk appetite.

It’s our duty to understand exactly what is important to our customers right now, and in the future

As Steve Jobs said, “People don’t know what they want until you show it to them.” If we apply that sentiment to the UK mortgage market, borrowers may not know about 15-year to 40-year fixed-rate mortgages with five-year ERCs unless you mention them. However, they may wonder why these weren’t presented as an option if, in five years’ time, they face a rate shock that they could have been protected from.

The best way to predict the future is to create it. So next time you’re sat down with a client, ask yourself whether you’ve considered all options to help create a future that best suits their needs.