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New UK bank Perenna will launch 20- and 30-year fixed-rate mortgages by the end of the year after it received full regulatory approval in early September.
The UK-based specialist lender, which was granted a license by the Financial Conduct Authority last August, is now allowed to offer home loans to customers who want to lock in rates for a longer period of time.
“What customers want when they’re buying or owning a home is stability . . . Ten or even five years ago, people said ‘(interest rates) will never go up,'” says Colin Bell, Perenna’s chief operating officer. We see that they do continue to follow the cycle.”
Demand for longer-term mortgage deals has grown over the past two years amid the cost-of-living crisis and successive increases in the Bank of England’s base rate, which pushed the average two-year fixed-rate mortgage cost to a 15-year high in August. Last month, homebuilder Taylor Wimpey said the proportion of its first-time buyers applying for mortgages longer than 36 years had more than tripled.
But Perena’s rollout of long-term home loans comes as BoE Governor Andrew Bailey expressed doubts about the need for further rate hikes. Bailey said on Wednesday that the U.K. economy was “very close to the top of the cycle, based on the evidence so far,” pushing sterling to a three-month low.
According to data provider Moneyfacts, Bell estimates that Perenna’s loan interest rate will be between 6.5% and 7.5%, compared with an average of 6.69% for a two-year fixed-rate mortgage.
Perenna is currently working on a waiting list and says it will be open to all potential clients as early as October.
Unlike Europe and the US, most fixed-rate mortgages in the UK are for two to five-year terms, partly because customers are reluctant to sign up for long-term products with high exit fees.
Simon Gammon, founder and managing partner of Knight Frank Finance, said: “In this country, you have a fixed rate with an early redemption fee, and usually the longer the rate is fixed, the higher the fee. high.”
Households may also be putting off longer-term mortgages because of price, he warns: “(A 30-year mortgage) will likely cost more than a two- to five-year mortgage.”
Perena will only charge a redemption fee for the first five years of a mortgage, Bell said, giving consumers more flexibility to act if they want to switch to a cheaper product after that time.
Responding to a question on costs, chief executive Arjan Verbeek acknowledged that UK consumers have traditionally not favored long-term mortgages. “If you get the cheapest mortgage and you have to move when the rate is double that, then you risk losing money,” he said.
Perenna will fund its mortgages by issuing covered bonds to pension funds and insurers for long-term financing, unlike most banks, which fund most of their loans through customer deposits. Perenna raised around £35m last year from investors including venture capital fund IAG Silverstripe, which also invested in P2P lender-turned-bank Zopa.
After surging earlier this year, mortgage rates continued to fall amid more upbeat UK inflation data and growing competition among lenders, with both HSBC and NatWest slashing rates this week.
David Hollingworth, director of brokerage London & Country, said the continued rate of decline in mortgage prices would slow.
“Going into the fall, there’s good news for borrowers, but the direction of travel for fixed rates has been a small decline, but it’s a small decline, not a cliffhanger,” he said.
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