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New British lender Perenna will launch mortgages with fixed rates for 20 and 30 years by the end of the year after receiving full regulatory approval at the start of September.
The UK-based specialist lender was granted a licence in August last year from the Financial Conduct Authority and has now been cleared to offer home loans to customers wanting to lock in rates for the long term.
Perenna chief operating officer Colin Bell said: “What customers need when buying or owning a home is stability . . . 10 or even five years ago, people were saying ‘[interest] rates never go up’, but we’ve seen that they do continue to follow cycles.”
Demand for longer-term mortgage deals has grown over the past two years amid a cost of living crisis and successive rises in the Bank of England base rate, which pushed the cost of the average two-year fixed rate mortgage to a 15-year high in August. Last month, housebuilder Taylor Wimpey said the share of its first-time buyers taking on more than 36-year mortgages had more than tripled.
But Perenna is launching its long-term home loans just as the governor of the BoE, Andrew Bailey, cast doubt on the need for further interest rate rises. Bailey said on Wednesday that the UK economy was now “much nearer the top of the cycle on the basis of current evidence”, pushing sterling to a three-month low.
Bell estimated that the rates for Perenna’s loans would range from between 6.5 and 7.5 per cent, compared with 6.69 per cent for the average rate on a two-year fixed rate mortgage, according to data provider Moneyfacts.
Perenna is currently operating a waiting list and said it would open up to all potential customers by as early as October.
Unlike in Europe and the US, the bulk of fixed-rate mortgages in the UK last between two and five years, partly because of reluctance among customers to sign up for longer-term products with high fees for leaving.
“In this country, you have fixed rates with early redemption charges — and typically the longer the fixed rate, the higher the charge,” said Simon Gammon, founder and managing partner at Knight Frank Finance.
He warned that households might also be put off longer-term mortgages by the price: “The likelihood is [a 30-year mortgage] might cost more than a two-to-five year deal.”
Bell said that Perenna would only apply redemption charges in the first five years of a mortgage, allowing consumers more flexibility to move if they want to switch to a cheaper product after this period.
Responding to the issue of cost, chief executive Arjan Verbeek acknowledged that UK consumers had traditionally not favoured long-term mortgages. He said: “If you get the cheapest mortgage out there but you have to move when interest rates are twice what they were, you’re at risk of making a loss.”
Perenna will fund its mortgages by issuing covered bonds to pension funds and insurers for longer-term financing, unlike most banks, which fund much of their lending through customer deposits. Perenna raised about £35mn from investors last year, including venture capital fund IAG Silverstripe, which has also invested in peer-to-peer lender turned bank, Zopa.
After soaring earlier in the year, mortgage rates have continued to fall following more positive UK inflation data and growing competition between lenders, with HSBC and NatWest dropping prices this week.
David Hollingworth, director at broker London & Country, said that continued declines in prices for mortgages would be slower.
“There’s positive news for borrowers heading into autumn but the direction of travel of fixed-rate has been to edge down but it is edging down rather than dropping off a cliff,” he said.
