Saturday Sitdown: Mortgage guru Colin Bell on why Brits are ready for 50 year fixed rates
Following the Bank of England’s recent interest rate rise and all the implications it has for the property and mortgage market, one firm is offering loans at a 30 year fixed rate, with plans to offer 40 and 50 year fixes in the near future.
Sold as a massive lifestyle enabler and gives people much more security and certainty because their monthly repayments are set in stone, City A.M. sits down with Colin Bell, co-founder and COO, of the firm in question, Perenna, which recently applied for a bank license.
Let’s kick off with the currently fiercely competitive mortgage market, your firm is making plans to offer 40- and 50-year fixes in the future. Certain home buyers will be able to borrow as much as six times their income and the firm will lend up to 95 per cent to first-time buyers. Is this a responsible move and not creating market instability?
We are planning to launch with a 30-year fixed-rate product, with ambitions for 40- and 50-year fixes, as well as shorter loans. As we are applying to be a bank, we will still have restrictions around how much we can lend people over the four and a half times applicant income threshold. However, this is still significantly more than the three times multiple that first-time buyers are typically offered through short-term fixes.
“Our lending is not irresponsible, it is safer. Rising rates will not harm our borrowers, as you see base rate went up recently.”Colin Bell
Equally, as our products won’t have standard variable rates, consumers that choose them will not have to worry about interest rates rising, and we don’t need to check they can afford the mortgage as rates rise as they won’t. It would be irresponsible not to challenge the UK’s growing housing market bubble that’s turning homeownership into a pipe dream for a whole generation.”
Do these plans demonstrate how the mortgage market has changed in recent months?
Growing concern around whether homeownership remains a viable option for UK consumers has caused lenders to look further afield to countries that use different funding models, such as the US or Denmark. Anxiety around imminent interest rate rises and the cost of living crisis has only fuelled this interest further. People aren’t keen on riding the remortgage rollercoaster and are looking for a more stable and secure future for their borrowing.
Long-term fixes are common in countries including the U.S. but less so in the UK – why is this?
UK lending still heavily relies on short term deposits to fund lending. The issue with this is that the lenders finance a 30 year loan with a deposit, which can be withdrawn at very short notice. For this reason the lenders offer mainly short term fixed rates, and high reversion rates to cover the risk should interest rates go up.
“In other countries mortgages are funded by pension funds and insurance companies buying bonds matched to the mortgage rate and term.”Colin Bell
UK pension funds will be able to invest for the first time in the UK mortgage market in an efficient manner, which will create a better mortgage market, and improve housing affordability.
How do long-term fixed rate mortgages compare to other products on the market?
In the past, long-term fixes have been inflexible, with expensive and long-term Early Repayment Charges, and unfortunately a few of these products do linger in the market. However, the new generation of long-term fixes we plan will offer a brighter alternative, with Early Redemption Charges similar to those that apply to a five-year fixed-rate, portability that allows them to be moved to another property and transferability allows them to be transferred with the property, and flexibility that allows the borrower to remortgage when the time is right for them not when they are forced to.”
What type of borrower is best suited to a long-term fixed rate mortgage?
A long-term fix is a great option for anyone looking to cap their mortgage cost or reduce their concern around future rate rises, whatever level of the property ladder they are on. With the average price of a home now sitting at 8.6 times average earnings, first-time buyers will struggle to step onto the property ladder without significant help from the Bank of Mum and Dad, or a lender who is sympathetic to their cause, and willing to stretch their Loan to Income criteria. Long term fixes help to alleviate these barriers.
“First-time buyers struggle to step onto the property ladder without significant help from the Bank of Mum and Dad.”Colin Bell
A long-term fix could also offer a good option for mortgage prisoners, allowing them to escape their existing lender’s Standard Variable Rate via more flexible affordability criteria. Long-term fixes could also help later in life borrowers release equity in their homes so they can enjoy their later life or help family members with deposits for their own homes.”
You mention that a long-term fix could be a great option for a borrower in later life – how so?
Over 50s have over £3tn in equity wealth locked into their homes. Homeowners of this age often have a strong income, thanks to their pension, but don’t have as much in the bank. Why shouldn’t they be able to unlock this property wealth to help their kids or grandkids to get onto the property ladder, or just enjoy a more secure retirement?
Let’s move on to the Old Lady. With expectations for further Bank of England rate rises in February, how could this impact the mortgage market and prospective borrowers’ ability to secure a mortgage?
UK borrowers have not seen a significant rate rise for over a decade, rates are now starting to rise , but many will never have experienced a high interest rate environment. Rates rising also means banks’ lending capacity falls as affordability tightens so it will become more difficult to borrow.
“Borrowers looking to remortgage may be in for a shock.”Colin Bell
Many borrowers looking to remortgage may also be in for a shock, as they leave relatively modest short-term fixed rates. The growing cost of other forms of debt will also impact budgets, alongside the ongoing energy and broader cost of living crisis.”
What products are available to borrowers currently in the long-term fixed rate mortgage space? (this should not merely promote their own products!
Currently, borrowers can access products with 10 or 15 year fixed rates, but these often come with longer-term Early Repayment Charges . Some products are available with 30-40-year fixes, but again are often accompanied by high fees or rates, as well as life-time Early Redemption Charges.
With time, will these products forge a role amongst mainstream UK mortgage options, or will they always be considered a specialist product?
I’d argue that long-term fixes can be considered mainstream as the standard fixed payments they offer provide stability and simplicity – for all types of borrower. The recent speculation and concern around rate rises is a useful reminder of how much anxiety tracker rates or Standard Variable Rate mortgages, for example, can bring to borrowers. I’d also add that when new competitors enter the long-term fix market, they are helping to drive prices down for borrowers, and cement these products among mainstream UK mortgage options.
Finally, anything else you’d like to share with our readers?
I’d encourage borrowers to keep an eye out for our launch, which is currently pencilled in for the second half of the year. In the meantime, look closely at the terms of the products you are signing up for. Don’t forget about mortgage fees as well, as they push up the real rate. More interest rate rises are also imminent, so factor these in before jumping straight into a short fixed product.