There has been a long road to recovery since the 2008 financial crisis and its impact on homeowners has been the driving force behind most of the regulatory developments that have taken place in the UK since.
After the crisis, the regulator introduced a new lending framework through the Mortgage Market Review and, while established for the right reasons, there were certainly unintended consequences.
In particular, the requirement for lenders to undergo stress tests has, in part, made it more difficult for some borrowers to access the real estate ladder. Was it a problem of regulatory change or is it really consumers’ product choice? For me, it’s the latter, as affordability checks were imminent.
The impact of these measures on some buyers is clearly visible in recent claims that the Bank of England (BoE) will relax mortgage rules in order to remove barriers for these borrowers.
However, it is not this legislation that is to blame, but a commitment to the status quo of Britain’s short-term mortgage market. If we are to help more people access housing, we need to innovate and find new approaches to lending, a longer term approach, which can safely remove some of these barriers for buyers.
The UK mortgage market is currently based on short-term fixed rate products. This approach works well for lenders who take advantage of deposits and credit swaps to fund their mortgages, but it does little to help homeowners.
Borrowers have to go through the remortgage process every two, three or five years, which means they could end up with very different and potentially more unaffordable mortgage rates when it comes to remortgage. This also comes with costs each time, as well as often Standard Variable Rate (SVR) periods.
In the years since the financial crisis, we have seen many attempts to help these borrowers take their first step on the ladder. But the truth is, these moves only work in favor of the short-term lending model – the way we’ve always done things, the status quo. Buying assistance is one such initiative, but as house prices continue to skyrocket, along with the rise in the cost of living, more and more first-time buyers (FTBs) are still excluded from the market. Rising rental prices also make it more difficult to save for deposits.
Real innovation to help these borrowers is sorely lacking. If we are to bring this crisis under control, we must get rid of inherited mindsets and take a radically new approach to mortgage lending. Flexible, open-ended products could be a welcome solution that will help remove barriers to affordability.
Good product, good time
The existing choice available, largely in the form of short-term products, prevents many buyers from moving up or even climbing the ranks. Stress testing at 3% above the SVR made it difficult for many borrowers to obtain a mortgage. While the BoE may soon ease those barriers, buyers already don’t need those stress tests when choosing a long-term, fixed-for-life mortgage.
Indeed, they are not subject to the same impact that rate variations would have on short-term products. This means FTBs can borrow what they need to afford that first home, while existing owners can borrow more to move up the ranks as well.
There is a lot to think about that long term fixes are a product whose time is now. In a world where prices are rising and borrowers are sensitive to rising bills, and with the potential for a base rate hike on the horizon, the certainty of a long-term fixed price offers much peace of mind. necessary.
But real innovation also means making these lifetime mortgages a flexible solution for customers. There may already be a number of long-term products on the market, but these options have been developed in a way that still supports the short-term model.
Products often come with high prepayment fees, and consumers understandably fear locking in a rate for 10 years or more.
If we in the mortgage market were to ask a consumer what their ideal mortgage would look like, maybe the answer would be a simple, inexpensive framework that offers long-term security, but also the ability to change if it does. wish. It is this model that has been so successful in other countries, such as Denmark and Germany. There those long term fixed rate mortgages are the norm.
The availability of competitive long term fixed rate mortgages is largely absent in the UK and at Perenna we believe that needs to change.
Short-term fixes may be how we’ve always worked in this mortgage market, but with homeownership rates falling we need a new approach to lending – adjustments aren’t enough. . That is why we will be offering flexible fixed life mortgages in the UK from next year and we hope to foster innovation as well as positive change for current and future generations of borrowers.
Colin Bell, Co-Founder and COO, Perenna