A paradigm shift in the UK mortgage market?
This week, a new bank called Perenna was granted authorisation to offer 30-year fixed rate mortgages in the UK. I was first introduced to the Perenna team a few years ago, so I’m very happy for them that they’ve reached this huge milestone.
As an American who grew up in a world where all mortgages were fixed for 30-years, I’ve always wondered why a similar system hasn’t been established in the UK, where homeowners regularly refinancing every 2 to 5 years (and taking on the interest rate risk associated with those refis).
Pros and cons
The Economist highlights the important point that while the mortgage is itself a fairly simple financial product, the way the market works in different countries is very different due to various competing political priorities.
On the one hand, the fact that everyone in the UK is on short-term fixes before reverting to variable rates is challenging, especially in the current climate of inflation and the cost of living crisis.
But, the article highlights that long-term fixes aren’t unequivocally good either. For example, they might discourage people from selling and moving because of the risk of having to enter into a much higher interest mortgage with the new property. However, we also know that the ease of moving is a big driver of economic progress and social mobility.
A middle ground
Denmark offers an interesting middle ground, whereby borrowers can actually benefit from rising rates by repaying only the present value of their mortgage rather than the full principal, essentially buying it back at market prices (remember as rates go up, prices go down).
This means that they are not disincentivised from moving house if jobs/economy/family needs determine they need to. Additionally, homes can be sold with the mortgage attached to it (a bit like companies can be bought/sold with all their debt attached to the assets).
Same same, but different
The Danish market, (and indeed much of the European mortgage market) is supported by the issuance of covered bonds, created from pools of mortgages that are sold to capital markets investors.
The US follows a different model, with federally guaranteed agencies (Fannie Mae and Freddie mac) buying mortgages off bank balance sheets and then issuing agency MBS into the markets.
In most European markets, covered bonds are issued directly from banks to institutional investors, but they are still “pooled.” In the Danish model, each individual loan is matched with a bond, and it’s institutional investors who take the prepayment risk, allowing borrowers more flexible pre-payment terms.
Supporting the covered bond market
At Origin, we have a number of covered bond issuers from all over Europe, and we’re very proud to support their activities in the capital markets, helping them provide financing to homeowners.
A special shout out to Nationwide Building Society in the UK, who recently completed their first 2 covered bond issuances on Origin, with fully digitised documentation. They were also the first issuer to list their securities on the LSE via our listing connection with them.
Interestingly, even though Nationwide’s business is almost entirely in the UK (with GBP mortgages), they were able to take advantage of the cross-currency swap market, and issue bonds into Nordic investors denominated in NOK. We helped with the preparation of the appropriate docs (including the swap termsheet etc).
As we continue to grow Origin, we expect covered bond issuers to increasingly use digital solutions like Origin. Hopefully that translates eventually to a safer, cheaper more liquid market for homeowners around the world.