A new UK mortgage lender is launching home loans that allow people to fix their rate for up to 30 years. It may also let them borrow more money than standard deals.
Perenna claimed that by giving people certainty over what they pay for up to three decades, its deals would free borrowers from the interest rate turmoil that has caused many people to be hit with dramatically highermortgage costs this year.
The startup bank, which has just secured full approval from the UK’s main financial regulators, also said it was not ruling out offering one fixed rate for up to 40 or 50 years in future.
Over the last few years there has been greater demand for longer-term fixed-rate mortgage deals, but – unlike in many other countries – the UK market is dominated by short-term fixed-rate products that typically last for between two and five years.
Perenna’s deal will let people fix their mortgage rate for 20 or 30 years. That means they will pay the same level of interest for the whole term.
The company is still finalising its pricing but estimated that the rates for its deals would come in at between 6.5% and 7.5%, which it said was “comparable to two-year fixes at the moment”. On Thursday, the average rate on a new two-year fixed deal was 6.67%, according to the data provider Moneyfacts, though there are best-buy two-year deals available priced at about 5.6%.
With mortgage lenders engaged in what some brokers have described as a fixed-rate price war, resulting in the cost of new deals falling, some borrowers may feel they do not want to tie themselves into a rate, possibly for decades, that could end up being uncompetitive. However, Perenna said its deals “buy you security, but with flexibility”.
There are other UK lenders offering longer-term fixes – Kensington will go up to 40 years – but, unlike its rivals, Perenna will allow people to go elsewhere after just a few years without having to pay a penalty. On a 30-year deal, the early repayment charges it imposes would last for five years.
Because there is no risk of repayments increasing, its clients are allowed to borrow more money. Perenna plans to let some buyers borrow up to six times their salary. Traditionally the typical maximum is four-and-a-half times annual income, though rising interest rates and high house prices have pushed that down to perhaps three times income for some buyers.
Perenna said the popularity of variable and short-term fixed-rate deals “leave mortgaged households dangerously exposed to rising rates, and first-time buyers struggling to get on the housing ladder”.
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Initially the bank will offer its mortgages to the 5,000-plus people on its waiting list over the next few weeks, and then to the wider public later this year – probably in October or November.
Perenna’s funding model involves issuing covered bonds to investors looking for a long-term stable income, such as pension funds and insurance companies. It said this meant that, unlike many traditional lenders, it was “not constrained by the short-term nature of deposits”.
