Time for a new mortgage product?

The UK finance industry should rethink how it funds mortgages, the COO of a newly formed company has said ahead of the launch of a 30-year fixed-rate loan he hopes will revolutionise the housing market.

Colin Bell’s firm, Perenna, intends to launch the long-term mortgage product later this year, offering up to 95% LTV and flexibility to change without penalties after five years.

Bell (pictured), who is also the co-founder of the new lender, cited countries such as the US and Germany where long-term fixes are the dominant product. By contrast, 30-year fixed rate mortgage loans are less common in the UK.

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Speaking to Mortgage Introducer, he said: “We’ve got to rethink how we fund mortgages across the board. It will take time for other people to be able to switch to this long-term product, but you can see how, in those countries where it does exist, it’s the product of choice.

“The big difference with the UK, and this is where it is unusual, is that it funds its mortgages with deposits, so you have a one-year or five-year fix on your deposit, but essentially they’re short-term products.”

In a statement, Perenna said it will use “an innovative funding model”, financing mortgages by issuing covered bonds on the London Stock Exchange instead of deposits.

Explaining the process, Bell claimed covered bonds posed a low risk to investors. He said: “We will be an issuer of covered bonds and we will match the bond to the mortgage. So if you want to do a 30-year fixed rate mortgage, we’ll do a 30-year fixed rate bond, so that funding will never change in price. It’s always there until it either matures and prepays, or prepays early.”

Bell, who has 26 years’ experience in the mortgage industry, claimed Perenna’s product will mark “a turning point” in the UK’s banking system, although he conceded there were challenges ahead.

“It does involve a big change. It’s not so easy for existing banks to do it because they have depositors and there’s rankings in terms of protection for particular banks.

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Bell revealed that the firm was currently undergoing the last stages of regulatory approval to obtain a banking licence, but said he hoped to launch the product before the end of the year, or early 2023 at the latest.

Critics of long-term mortgage loans claim the products are not portable and that borrowers cannot transfer their mortgage, which can cause problems if they decide to move. Additionally, if they wish to repay the loan, they are hit with early repayment charges (ERCs).

Bell, however, stressed that Perenna’s product offering would avoid all of the typical pitfalls, as it will be portable and involve no penalty charges after five years.

“You can take it with you and it will be transferable, which is a new concept in the UK,” he added.

He said the product will prove popular with many groups, including first-time buyers, people borrowing later in life, borrowers on a standard variable rate and individuals wanting to release equity from their property.

He said: “First time buyers will benefit because there’s no interest rate stress. It gets them on the property ladder earlier and gets them off renting as long as they’ve got a deposit of up to 5%.

“We’ll give them a 30-year mortgage, whatever the age. We understand that people may or may not outlive their mortgage. That’s fine. There’s nothing wrong with that as long as the mortgage is affordable.”

The senior banking executive dismissed suggestions that launching such a product would be risky at a time when rates and inflation are soaring, and when house price rises are breaking new records.

Recent research from the Office for National Statistics showed that up 30% of people were finding it hard to service their mortgage because of the cost-of-living crisis, while 43% of respondents admitted they would not be able to save money in the next 12 months to buy a home.

Bell said: “I think this product helps from a consumer angle – it’s designed around consumers. The government worries about interest rates rising on national debt and yet it’s fine for consumers to take out a £200,000 loan and ride that interest rate. We don’t think it is.

“In the cost-of-living crisis, what would be better than to know your mortgage is never going to change while your electricity bills are bouncing all over the place? I think in terms of instability, long term fixes are definitely the answer. It is a great time to launch because we are seeing interest rate rises, we’re seeing inflationary pressures, we’re seeing cost-of-living prices which are hurting everyone. The more instability there is, the more reason there is to fix your mortgage for the longer term.”