Speaking on a panel at Deal Catalyst’s Annual Investor’s Conference on UK Mortgage Finance, the lender’s head and founder Arjan Verbeek said people “underestimate the power and impact” that long -term fixed rates have on the market.
He explained that in the UK house prices were higher than the income multiples offered by lenders, which meant that people struggled to afford a property.
“House prices are a function of affordability, what customers could borrow to actually pay for a house, and what people generally don’t give enough credit to is that house price affordability in the UK is based on standard variable rate (SVR) plus one per cent, which is around nine per cent interest rates.
“If you offer a fixed for life mortgage at six and a half or seven per cent, you can afford a 20 per cent larger loan and that means houses generally are very affordable,” Verbeek said.
He added the issue was not that housing was “not affordable” but that the “mortgage product being offered isn’t suitable”.
“If you remove market risk from people, they know what they’re going to pay, they set up to pay that amount and they can afford a higher loan and they can afford to buy a home… so it’s a perfect product for people that stretch themselves potentially to get on the housing ladder,” Verbeek noted.
He said arrears would also be lower as there was “no shock” pointing to the US and the Netherlands where long-term fixed rates are more common and the arrears rates are lower.
However, he said that flexibility was the “key thing” for long-term fixed rates to grow in popularity.
“You need flexibility to live your life, to change your home and change your mortgage. Consumers should have their cake and eat it, and it’s up to the banks to manage interest rates, repayment risk, etc in the financial markets.
“That risk should not be put on borrowers; they should live their life. We should manage the market risks… It’s all about affordability and the ability to pay. It can be 150 per cent LTV if you repay it,” Verbeek said.
He noted that there was a “lot of interest” in Perenna’s product as security was growing in importance for consumers. He said as long-term fixed rates offered an “affordability boost” then it could be popular with consumers.
When asked whether long-term fixed rates would push up house prices, Verbeek said a focus on affordability would not push up house prices as they were “already 20 per cent overvalued”.
Broker mode incentives short-term fixed rates
Greg McClelland, chief financial officer at Gen H, said there needed to be changes to the broker model as short-term fixed rates were currently prioritised.
He explained that Gen H started off as a direct-to-consumer business, and at the time the product split was equal between two and five-year fixed rates. Once the lender became an intermediated business, the proportion of two-year fixed rates sold rose to 80 per cent.
“It’s the same rates but all of a sudden the advice has changed the outcome,” he noted.
McClelland continued: “I wouldn’t call out all brokers as there are brilliant brokers out there but clearly the model that we have incentivises the selling of short-term fixed rate products, unless we can really push through the things that Consumer Duty stands for, it’s hard to see that changing.”
Verbeek continued that the broker model would be changed by Consumer Duty, and brokers may not yet realise the extent it could change their business model.
“You cannot say you know the two-year fixed rate gives you a good outcome because the chances are they won’t. So, things will change and it will be an interesting journey,” he added.
Income caps and capital ‘stifles innovation’
McClelland said the mortgage market was currently set up to “favour the big lenders”, noting that the 4.5x income limit was a “real problem” for Gen H as a first-time buyer focused lender.
He explained that as it started two years ago it was lending a lot of high loan to income (LTI) loans to its customers who typically were first-time buyers, but it did not have a backbook to offset that, whereas larger lenders had big backbooks of remortgages and product transfers.
“It’s stifling how we want to lend, how we think we can lend responsibly, and we can’t do the lending we think we can do,” he said.
McClelland added that in the two or so years that the lender had been running there had been no arrears.
“We think we can do this [lend at higher loan to value (LTV) tiers] and we think we can do responsibly but we’re stopped, he added.
McClelland noted that there were also capital constrains in lending at higher LTV tiers as larger banks did not have to put a large amount of capital against this type of business whereas lenders using standardised modelling had to put more capital against it.
He noted that as a new provider this meant that they could not be as competitive on prime lending even with cheaper deposits.
“They can’t fund, they can’t compete and that stifles innovation,” he added.
