UK-based firm Perenna is launching its American-style mortgage this autumn after receiving full regulatory approval from the Financial Conduct Authority (FCA).
Borrowers traditionally lock in fixed-term deals for short periods, such as two or five years. But Perenna is aiming to make 'structural change' to the UK mortgage market with its fixes that are three decades long.
Here, Which? explains how an ultra-long fix could work, alongside advice on what you should consider when locking in a mortgage in a time of economic uncertainty.
Why is Perenna offering a 30-year fix?
Perenna believes homeowners should be shielded from interest rate uncertainty.
So, it has created 20-year and 30-year fixed products that will offer long-term 'stability' by locking in a rate for the duration of a mortgage term.
Those who take on this type of loan will not need to remortgage every two or five years (as is the norm in the UK) and deal with the associated costs (ie valuations, and product fees).
The bank, which has taken inspiration from the US and Denmark, believes the current interest rate environment proves there is a market here for ultra-long fixes.
Perenna's co-founder, Alan Bell, told Which?: 'In the US, 80% of mortgages are fixed for at least 20 years. They don't bet their home on interest rates like we do.'
Find out more:How much will the deals cost?
The bank estimates that the interest rate for the ultra-long fixes will fall somewhere between 6.5% and 7.5%. This means someone taking out a 30-year fix could be paying up to 7.5% on their home loan for the full 30 years.
The average two-year fix is currently 6.64%, but the cheapest deals can be found for around 5.6%. The average five-year fix stands at 6.14%, with the best rates coming in around 5.1%.
Perenna's envisaged rates will therefore be mid-to-high on the cost spectrum.
Find out more:Will there be penalties if you switch mid-term?
The lender will allow borrowers to go elsewhere after just a few years without being penalised.
This may prove beneficial, as in five years, interest rates could be lower than we're seeing now - giving homeowners the chance to chase a better rate.
Bell said: 'Our product offers improved affordability, certainty of monthly payments, and flexibility through low ERCs.'
Find out more:Who can take out a mortgage with Perenna?
To begin with, the bank will offer its mortgages to those on its waiting list. Applications will then be opened up to the wider public in the last quarter of this year.
First-time buyers, home movers, remortgagers and retirees are all set to be on Perenna's radar.
As there isn't a risk of interest rate rises during an ultra-long fix, first-time buyers may potentially be able to borrow more as there won't be stress tests at higher rates.
First-time buyers will also be able to secure a mortgage with Perenna with a minimum deposit of 5%.
Find out more:Is there a demand for ultra-long fixes?
Data from financial analysts Moneyfacts suggests demand for two-year terms (54.5%) significantly outpaces demand for five-year (27.5%), three-year (7.6%) and terms of 10 years or more (8.8%).
The majority of homeowners are looking to lock in two-year deals in the hope of remortgaging onto a cheaper deal in 2025 when interest rates have potentially calmed.
Perenna, however, says it has a waiting list of 5,000-plus people, and the bank is considering introducing even longer fixes - such as 50 years - in future.
Bell told us he 'can see no reason' as to why Perenna can't become a trailblazer and encourage other lenders to bring ultra-long fixes onto the market.
A rival of the new bank will be established lender Kensington, which already offers fixes up to 40 years. Its most expensive rate is currently 6.41%, while its leading 30-year term is 5.65%.
Find out more:Should you consider an ultra-long fix?
But interest rates tend to come in cycles, and the general consensus is that we're getting near to a peak - meaning you could be consigned to paying a much higher rate during an ultra-long fix.
We can't predict the future though and it's impossible to know exactly where rates will be in a few months, let alone years ahead.
For those who want certainty in knowing what their mortgage bill will be for decades to come, a 20 or 30-year fix could suit you, and the ERCs only applying to the first five years means you will have the flexibility to switch if things change.
How is Perenna funded?
The new bank will fund its home loans by issuing covered bonds to investors looking for a long-term stable income, including pension funds and insurance companies.
This process is different from most UK banks, which raise funds through customer deposits.
Which? advice on getting a mortgage
If you're looking to get a mortgage and don't know where to begin, we're here to help.
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