Speaking to this publication ahead of Deal Catalyst’s Annual Investor’s Conference on UK Mortgage Finance in September, Arjan Verbeek, founder and chief executive of Perenna, sat down with us to talk about product launches, underserved segments of the market, Consumer Duty and barriers to adoption of long-term fixed rates.
Verbeek will be speaking on the panel ‘Amping Up Affordability: Products for First Time and Later in Life Homebuyers’ at the Investor’s Conference on UK Mortgage Finance on the 12 September at the London Hilton on Park Lane. Mortgage Solutions has secured a 20 per cent discount on tickets for its readers, follow the link to secure the offer.
Q: Perenna was given its banking licence with restrictions last year, how is the process to become fully licensed going?
A: We are on schedule to have our restrictions lifted and start lending in September. We are finalising the capital investment documentation, which is the only requirement left.
Q: Reports have said that you are aiming to release 20-year plus fixed rates in Q4. Are there any specific segments of borrowers you are targeting and are you on track to deliver at that time?
A: We do not really target a particular segment, because at Perenna we believe everybody should select a long-term fixed rate and avoid taking market risks. When borrowing a large amount of money secured on your house, you should make sure you can afford the payments whatever happens to interest rates.
The warning “you can lose your house if you do not keep up with payments” is a real risk. Many people are finding that out at the moment, because everybody takes interest rate risk in the UK market.
This said, there are underserved segments of the mortgage market that will naturally be more attracted to our mortgages. These are homebuyers at higher loan to value and loan to income (LTI) who are vulnerable to interest rate risks and therefore benefit from locking in payments for the long term. This will allow them to borrow the largest amount possible.
The other segment is borrowers over 50, who currently have very few options. These borrowers are probably not able to repay their mortgage before retirement and will need to make sure they can service the mortgage from pension income. Fixing the payment provides this certainty.
The other market segments are used to being sold the cheapest rate, not focused on the risk they take but just price. It will take time for the market to be reformed where mortgages are priced fairly and not subsidized by low saving rates, and people aware of the risks they take.
Q: With current volatile market conditions, do longer-term fixed rates of 20 years or more offer the best outcomes for the consumer?
A: Absolutely, in our opinion we will deliver the best outcomes for consumers. Locking in the interest rate means you avoid the worst outcomes. The new Consumer Duty states you need to make sure the product provides “good” outcomes for borrowers, and we will deliver that.
People borrowing on a short-term fixed run the risk of being forced to sell if rates rise, which is a risk that cannot be ignored, so the probability of a good outcome is much lower. In our view, you must consider all potential outcomes for a borrower, and avoiding the risk of losing your house must be high on the priority list.
Q: What impact will Consumer Duty have on longer-term fixed rates?
A: I think it will boost the number of longer-term fixed rate products. The risk of not delivering a good outcome is real, which means more vulnerable highly leveraged borrowers should be advised to take a long-term fixed rate mortgage to avoid bad outcomes.
There is a lot for the risk and compliance departments to think about with respect to the profiles of their borrowers and vulnerabilities when offering short-term teaser rate mortgages.
Q: What are the barriers to longer-term fixed rates becoming more widely accepted in the UK and how can they be addressed?
A: The main barrier is the current structure of the market, which is focused on selling cheap. Risk is hardly seriously considered, but very real as we can observe in the current environment. The Consumer Duty is likely to help educate the market to focus more on risk, and the recent experience will have taught many people.
The regulators should ensure the market is fair and competitive, which means removing the standard variable rate (SVR) and the LTI flow limit, no other country I know off has those features and their markets work much better.
The adoption of long-term fixed rate mortgages will increase rapidly in our view because the homebuyer and later life borrowing segments are growing as a share of the market and the general increased focus on vulnerability.
Q: Do you think longer-term fixed rates will grow in popularity and other lenders may try to enter the space?
A: Absolutely. The market is growing, and changing regulations will create a more competitive environment in the mortgage market generally. People are highly leveraged and need the certainty of payments. I have no doubt many new lenders will start focusing on long-term fixed rate mortgages when the segment grows.
Q: What has the broker engagement and feedback been like on Perenna’s offering?
A: It has been very good in general. Obviously, habits do not change easily, and many beat the old drum, but the realisation that change is coming is growing. And we offer a good product without compliance challenges, opening up a new market segment for many brokers because current people are unable to get a suitable mortgage product. The good ones realise this is a huge opportunity.
