Mortgage crisis ‘could have been avoided’ if UK lenders ‘adopted’ longer solutions | Personal finance | Finance

Since the announcement of the budget, which included huge tax cuts for high earners, mortgage lenders have withdrawn hundreds of products as the pound fell to an all-time low against the US dollar. The chaos was further propelled as it is now expected that the Bank of England base rate could peak at around 5.5% in 2023, from 2.25% currently. The aftermath of the mini budget announcement has seen some monthly mortgage payments rise by £500 and forced some Britons out of the property market altogether as they cannot be accepted for a deal at the new rates.

According to experts from Persistenta provider of long-term fixed mortgages, this ‘mortgage crisis’ occurred because of the UK’s reliance on short-term mortgages and it ‘could have been avoided’ if the country had embraced the notion of long-term solutions.

Colin Bell, COO and co-founder and Arjan Verbeek, CEO of Perenna argued that if long-term fixed products had been more widely available, the majority of current borrowers, who were already on long-term fixed rate mortgages , would not be faced with the rise of the interest rate crisis that the United Kingdom is going through.

They added that consumers would also not be concerned about the current lack of choice in the market, as they would not need to change their mortgage until the appropriate time and not at the end of their fixed rate.

Speaking exclusively to Express.co.uk, Mr Verbeek said: ‘Everyone has been talking about more affordable housing but it really can’t be because we’re in an overall unstable system. If someone with an average salary can’t afford an average house, then it’s not stable.

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Mr Verbeek explained how the UK has a system of variable rate short-term mortgages based on interest rates, and with every financial crisis interest rates have risen and when that product, accessibility decreases.

This leads to lower house prices because people cannot afford it, but regulates the market because house prices do not rise to an incredibly high level.

However, after the financial crash of 2008, property prices fell, but due to the fall in interest rates to 0.5% in 2009 in an effort to support the economy, property prices real estate did not fall to the corrected level and continued to rise while rates remain unchanged. until the Brexit vote in 2016.

With the UK having a system that primarily favors short-term mortgage transactions, such as two to three years, this means the whole system is ‘incredibly unstable’ and can be severely disrupted by financial shocks and then internal affects massively the ordinary person when these shocks occur.

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Mr Verbeek said: ‘A person’s mortgage is usually one of their biggest expenses each month and the current system does not promote stability.

“What we’re doing is giving people a 30-year locked-in mortgage, paying 3% to 10%, and the ability to plan their lives because they won’t experience a market shock that will increase it.”

Mr Verbeek and Mr Bell pointed out that the UK’s approach was ‘very different’ from other countries like the US and Denmark and that in response to a financial shock, the UK is doing worse because of its mortgage market.

Mr Verbeek said: ‘Our research found that people in the UK, who have variable rate mortgages, tend to cut spending after taking a financial hit to their mortgage, which then has a negative effect on the economy.

“However, Danes have been found to be increasing their spending because they haven’t had a shock to their mortgage payment, so they’re going to take advantage of the bargains that can be had with a declining economy and can actually help the stimulate.”

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Mr Bell also pointed out that the current system of short-term mortgages also limits the number of people who can take out mortgages, in particular due to the cap on the loan-to-income ratio (LTI) and the stress test, even after the removal. of this requirement.

He said: “The majority of lenders continue to use stress testing with their mortgage products because if rates go up they need to make sure someone can afford it.

“However, what the rental market has proven is that many are able to afford more than the lender decides, but are shut out of the market due to the stress test and the nature of the mortgage market. short-term variable rate.

“Many people have the ability to borrow more and even pay more each month at a fixed rate, but are not allowed to do so due to current rules and regulations.”

Perenna has contacted Her Majesty’s Treasury with her findings and told the department her thoughts on how the UK can “change course” when it comes to the mortgage sector.

Mr Verbeek said: ‘The UK government has all our data and information it just needs to act on it.’

The duo noted that long term fixed rate mortgages in the UK are currently ‘inflexible’ and generally have high prepayment charges which Perenna says are put in place to ‘stop people taking the option “.

Mr Verbeek added: “In Denmark, these prepayment penalties don’t exist and after a certain period of time, it doesn’t matter, people can move after five years. We really have to look beyond our borders at how others are doing it”

Mr Bell stressed that the concept of Perenna, which is being offered to Her Majesty’s Treasury, is to encourage people to hold on to their mortgages for their full term and that they “actively encourage portability”.

He explained: “Portability absolutely, with us people can borrow more money if they negotiate and they can repay some of it if they negotiate down, we can add loan parts to a mortgage, so if someone buys a bigger place and you want to borrow more or someone earns more then they can add a mortgage on it and take it with them.

“If the new rates are better at that time, then the entire mortgage is refinanced, but the main point is that it’s the customer’s choice and not forced by the lender.”

Perenna must continue to promote the concept of long-term fixed rate mortgages, but the market may already be starting to take interest in the idea of ​​locking in longer.

In the last few weeks since the mini-budget, some lenders have started offering cheaper solutions for 10-year mortgages compared to two-year ones. However, this could be a market prediction that interest rates will remain high for the foreseeable future.

Mr. Verbeek said: “The market has to start looking at the consumer side and that is what we are doing. The existing market does not know how to resolve itself and that is because it is not in its own interest to do so.

“We need a new voice and a new thought process to turn the corner and that’s what we’re trying to deliver.”

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