People willing to pay £1,200 more a year for a ‘certainty premium’

Most people are willing to pay a ‘certainty premium’ of £1,200 per year for a long-term guarantee of fixed mortgage repayments, research from Kensington Mortgages shows.

In a survey of over 4,000 renters and homeowners, 83% would consider a long-term fixed-rate mortgage over a short-term if it provided greater certainty of mortgage repayments.

However, the results highlight a general lack of awareness around long-term fixed-rate mortgages. Today, there are several long-term fixed-rate mortgages available on the market – ranging from five to 40 years. Yet 26% of respondents believe the longest fixed-term rate available is between two and five years. Some 12% believe the longest is up to 40 years and 16% do not know at all.

The study also reveals that most homeowners are unaware that long-term fixed-rate mortgages can improve affordability. If homeowners were to buy again, three-quarters (75%) would choose a long-term fixed-rate mortgage if it increased their chances of borrowing more and are able to buy a bigger home.

One of the principal benefits of mortgages with a fixed-rate term is that they provide certainty of fixed monthly payments for a set period, making it one of the most common products. Some 59% of homeowners surveyed are on a fixed rate product, while more than two-thirds (68%) do not have a fixed-rate mortgage that exceeds five years.

Borrowers on a short-term fix will remortgage more than those on a long-term and could pay hundreds of pounds in product fees each time; it also runs a greater risk of not being able to remortgage at the end of the fixed term and being stuck on a higher variable rate.

Affordability is an issue first-time buyers and renters in particular struggle with when trying to buy; 25% of renters who attempted to purchase a home in the last five years were unsuccessful and of these, 23% did not pass affordability checks and 25% could not borrow as much as they needed.

However, many are eager to step onto the property ladder – 70% of renters would consider a long-term fixed-rate mortgage if it meant they could afford to buy instead of rent. Even three-quarters of homeowners would consider one next time if it allowed them to borrow more and buy a bigger home.

Despite the benefits, some general reservations are shared by renters and homeowners. The main reasons for wariness are: if interest rates in the wider market decrease and the borrower is locked in and unable to move the product elsewhere (33%), personal circumstances changing within the term (30%) and having to pay fees if moving home (26%).

When asked if they would still be concerned about these issues if there was a long-term fixed-rate product that removed these barriers, 88% would consider one.

Kensington Mortgages is looking to expand its product range to include a number of long-term fixed-rate mortgages which will offer flexibility for borrowers looking to move or sell their home.

Vicki Harris, chief commercial officer of Kensington Mortgages, comments: “While mortgage terms of 30 years or higher are the norm, our research shows that the benefits of long-term fixed-rate mortgages are less well-known.”

“These products may have higher interest rates than shorter-term mortgages in the early years, but you can often borrow more and they reduce the risk of being unable to remortgage, if any financial circumstances take a turn for the worse after the mortgage is taken out. It also acts as a protection against any future interest rate rises.”

She adds: “For some, it could be the only way to afford a property. And for those who are struggling to step onto the property ladder, speaking to a mortgage adviser about these products could be a serious alternative if they haven’t already been considered. That’s why we’re soon launching our own long-term fixed product range to help give borrowers even more choice and flexibility.”