United Kingdom

New mortgage lender claims it will let you lock in your interest rate for THIRTY years

A new mortgage lender is planning to offer UK borrowers the ability to fix the rate of interest on their mortgage for up to 30 years.

Perenna, which raised £7.3million during its latest funding round and plans to launch this summer, wants to bring 'fixed for life' mortgages to the UK market. 

UK borrowers will be familiar with much shorter fixed-rate deals, where the interest rate is guaranteed to remain the same for a set period of time - typically two or five years.

Perenna aims to offer 30-year fixed-rate mortgages with deposits as low as 5 per cent

After this, borrowers are typically put on a higher rate, or remortgage to get a better deal. 

But Perenna said it would enable its future customers to fix their interest rate for the entire life of the mortgage, meaning they may never need to switch.

'Our mission is to create a nation of happy homeowners, where everyone who can afford a home can get one,' said Colin Bell, co-founder of Perenna.

'Our customers will benefit from a single, easy-to-understand rate for the entire lifetime of the mortgage - that's why we call it fixed for life.

'That means they'll have the certainty of knowing exactly what they need to pay each month for the next 30 years, but it also means no hidden refinancing costs and no need to keep searching for a new product every two or five years.'

What will this mean for borrowers? 

Typically, when a borrower's initial fixed interest rate comes to an end they will look to remortgage, either with their existing lender or a new one. 

Failing to do so can have serious financial consequences. Lenders will place borrowers who have not switched their deal on to their standard variable rate - the 'default' interest rate which is also often their highest. 

Colin Bell, the chief operating officer and co-founder of new mortgage lender Perenna

The average interest rate for someone on a SVR is 4.41 per cent, compared with the average two-year fixed deal of 2.44 per cent, according to the latest Moneyfacts data.

That means someone with a £200,000 mortgage over a 30-year term would end up paying £1,003 a month, as opposed to £786 a month if they had opted for a new two-year fixed deal.

More than a quarter of homeowners are on their lender's SVR, paying up to £4,080 more per year than necessary, according to research conducted by online mortgage broker Habito.

Perenna said it wanted to remove the risk of monthly payments increasing during the lifetime of a mortgage.

'Our impression is that moving your mortgage can actually be overly complicated,' said Bell.

'Thousands of consumers simply fail to remortgage and unwittingly switch onto their lender's standard variable rate.

'This is often a much higher rate of interest than they would otherwise need to pay, leaving borrowers facing higher monthly fees.'

Does this mean you will be stuck with Perenna for life?

One of the advantages of traditional two and five-year fixed rate mortgages is that they offer borrowers the flexibility to switch deals and providers.

Fixing for longer could impact a customer's ability to change their mortgage, borrow more, or even move home before the end of the term, as there could be expensive early repayment charges for doing so.

Perenna claimed it would offer its customers the flexibility to change at no extra cost after five years.

Customers will have the option to remortgage after five years without incurring a charge

'Flexibility is very important to us and, while other long-term, fixed-rate mortgages currently available are subject to very expensive exit fees, Perenna's products will be completely free of any early repayment charges after just five years,' said Bell.

'We will also allow borrowers to move to a new property while keeping their existing mortgage, as long as the value of the property remains consistent.'

How does it compare?

Perenna's 30-year fixed rate deal will be twice the length of anything else currently offered on the UK market.

'Long-term fixed-rate mortgages are relatively unknown in the UK, but are the norm in places like the Netherlands and the USA,' said Martijn van der Heijden, chief financial officer at Habito.

'Most recently we heard of 20-year fixed mortgages being offered at 0 per cent interest in Denmark.'

In the UK, Virgin Money, Accord Mortgages and Yorkshire Building Society offer the next best thing via a 15-year fixed rate of interest, but that is as far as any lender will go.

10-year fixed rate deals are more common, with 129 options available across the market - but almost all come with a penalty if you decide to switch or pay off the mortgage before the fixed rate period ends.

'The issue with most 10 or 15-year fixed rate deals we see at the moment is the early repayment charges being payable throughout that timespan,' said Chris Sykes, mortgage consultant at broker Private Finance.

'With Perenna, early repayment charges are only incurred within the first five years, so it could be a fantastic opportunity for people to gain long-term security but also retain some flexibility at the same time.'

Perenna said it aimed to offer mortgages to cover 95 per cent of a property's value, which could be good news for first-time buyers currently saving for a deposit.

Perenna said it hoped to offer 5 per cent deposit mortgages, which appeal to first-time buyers

That is particularly relevant now when, of all the 10-year fixed rate deals on the market, only three are available for borrowers requiring a mortgage that covers 90 per cent of a property's value. There are none that will cover 95 per cent.

Of the three lenders willing to cover 90 per cent of a property's value via a 10-year fixed rate deal, only one, Virgin Money, is open to new borrowers - you need to be an existing customer for the other two.

Virgin Money's 10-year fixed rate deal for those with a 10 per cent deposit is only for first time buyers, and is available at a rate of 3.89 per cent with a £995 fee, or 3.99 per cent with no fee.

Perenna said it expected the interest rates on its 30-year fixed rate deals to range between 3 and 3.5 per cent.

These rates are competitive based on current rates for 90 and 95 per cent mortgages, although significantly higher than lower-LTV deals. 

This means the product could be good for first-time buyers, but they may seek to switch once they have built up some equity and could get a lower rate elsewhere.  

'Remortgaging can be costly, with customers often paying a £999 upfront fee and £500 solicitors fees every 2 years for example, but it is often worth the costs to get the better interest rate,' said Sykes.

'If this lender is offering competitive rates for a 95 per cent mortgage, then it will be fantastic, but I don't see why someone would stay with them any longer than the five-year minimum, if they are then able to switch and get a better rate elsewhere.'

Who will this appeal to?  

Perenna's 30-year fixed deal will probably appeal to first-time and younger buyers who expect to stay in the same home for the long term.

Equally, it might appeal to anyone who would prefer to avoid the costs, time and effort involved with remortgaging.   

'If Perenna can help first-time buyers to borrow the amounts they need without being exposed to higher payments this could prove popular,' said David Hollingworth, associate director at L&C Mortgages.

'Alternatively, a young family looking to buy their forever home may like the chance to fix their rates for the long run, to know where they stand.'

'Allowing customers to exit freely after five years could help to broaden the appeal, as many borrowers will like the protection against rates climbing in future as long as they don't have to be tied in indefinitely.'

One limitation is that the property will need to be the borrower's primary home, as to begin with Perenna will not lend to property investors. 

Should you sign up?

Perenna hopes to issue its first mortgages in the summer, once it has secured a banking licence.

At this early stage there are still a lot of unanswered questions. What will the exact interest rates be for its products? What will its criteria be for granting mortgages and who will be eligible? What type of properties will it lend on?

Some brokers also questioned borrowers' appetite to be tied in to long-term deals.  

'Ultimately, some borrowers will be swayed by the chance to cut their payments by opting for a shorter-term product,' said Hollingworth.

'But perhaps more importantly borrowers often shy away from locking into a deal for such a long period.

'Although Perenna claims its mortgage can be moved to a new property, there is no certainty that the lender would agree to any additional borrowing if that was required.

'But its intention to exempt borrowers from any early repayment charges after just five years will at least give customers the chance to review their deal, if they need to, whilst still enjoying the benefit of the long-term budgeting certainty and security.'

Those keen to hear when Perenna's products are launched can visit the sign-up page on its website.

Best mortgage rates and how to find them with This is Money's help

This is Money has partnered with L&C Mortgages, a firm of independent mortgage brokers who specialise in finding the best mortgage rates and the right deal for you. 

>> Compare the best mortgage deals available now  

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