The only mortgage you'll ever need, with Arjan Verbeek
"It's important that in every interest rate environment, in every market environment, an average family can afford an average home" - Arjan Verbeek, co-founder at Perenna Bank.
The UK mortgage market has long been underpinned by the belief that, as long as the music kept playing, you would be able to refinance from one lender's short-term teaser rate to the next, without ever having to pay the full price... but then the music stopped and UK borrowers found themselves saddled with fast-rising standard variable rates. Household budgets were torn to shreds, and all while inflation ran rampant on the High Street, too.
Few escaped. And perhaps fewer still realised that variable rates were the reason they'd been unable to qualify for a mortgage in the first place. Variable rates can, of course, vary, and so, not wanting to carry the risk for this, lenders build a buffer to protect themselves through both a regulatory stress-test applied to affordability calculation and a significant down payment requirement. In a world where we all have to stretch ourselves incredibly thin to afford a house, that can be the difference between renting again and owning.
If only there was another way... like, say, the way they've been doing it in Denmark for the last two hundred years! In today's episode, I'm speaking to Arjan Verbeek, co-founder and CEO at Perenna Bank and vocal proponent of fixed-price long-term mortgages in the UK.
Perenna Bank is over at: https://perenna.com/
They're also on LinkedIn at https://www.linkedin.com/company/perenna/
As is Arjan himself, who is well worth the follow: https://www.linkedin.com/in/%F0%9F%87%B3%F0%9F%87%B1-arjan-verbeek-5884681/
And while you're there, find and connect with me at https://www.linkedin.com/in/brendanlegrange
Meanwhile, my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is discussed at https://confirmu.com/ and on episode 24 of this show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback or questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Keep well, Brendan
The full written transcript, with timestamps, is below:
Arjan Verbeek 0:00
It's a market with significant risks that are all put on the borrower.
Making a decision to buy a house is an easy one, because most people want to own a home! But nobody has the money just to buy one, people need to borrow, and need to borrow a lot of money.
But if you look at before the financial crisis, the mortgage products haven't changed since then. You know, if you change your product into a long dated fixed, you protect the borrower, you can lend a higher amount, they need less of a deposit. Everybody needs a home. Otherwise you store up issues for the future. So this is why we said, 'hold on, let's make that happen'.
The snowball has started to roll and the benefits.
Brendan Le Grange 0:44
When interest rates exploded late in 2021, almost every British homeowner felt the pain and by passing it on to their tenants, most renters too. You see, the monthly mortgage payment for a typical house could easily have gone from £1,300 pounds to £1,800 pounds in the space of a year. While everything else was getting more expensive too. And the faster those other prices rose, the faster rates rose, causing an escalating cycle of pain for households who had, from their side, been doing nothing different. If only there was another way...
But doesn't every country run mortgages like this?
Welcome to How to Lend Money to Strangers with Brendan le Grange.
Arjan Verbeek, CEO and co-founder of Perenna, welcome to the show.
Arjan Verbeek 1:45
Thank you.
Brendan Le Grange 1:45
Arjan, I grew up in South Africa at a time when mortgage interest rates were really high, well into the double digits, and always at risk of rising. And invariably there was talk of interest rates, are they going up again? Are they staying where they are? But then interest rates kind of disappeared as a topic of discussion. We had this decade or more of flat interest rates, and perhaps we got a bit complacent. Because, you know, a year or two ago, when interest rates started rising post COVID, they caused chaos - I think around the world, but maybe most significantly here in the UK.
You were not taken by surprise by this, you weren't walking around with one of those signs saying 'the end is nigh' but, for the last decade, you've been working to try and get the message out that there's something wrong with the structure in UK mortgages. So before we talk about Perrena and what you're building there at the bank, would you mind starting with that vision behind it, and what you saw at a high level that made you worried all those years ago and why you've been working so hard to bring about pretty fundamental change.
Arjan Verbeek 2:57
I've been in mortgage finance for 20/30 years - I've seen a few cycles, and they've lived through the crisis.
People need two things in their lives: they need shelter, they need a home, and then you have income. That's the core of living. And you just have to take the interest rate environment as it is and buy a home when you want a home, right.
It's important that in every interest rate environment, in every market environment, an average family can afford an average home, because then people have a happy life and we have a stable society, etc.
Now, when I started looking at the market, this was, let's say 2000. I was at Moody's analysing the details of all mortgage markets across the world, and then went into banking, financing mortgages, structures all over the world, you start comparing and contrasting different systems the way they operate. And then the financial crisis hit and you see, hold on, this is not right. We have a major issue here. It was much better than other countries. Obviously, all countries have problems, but consumers were protected in other countries like the Netherlands, like Denmark, like the US. They did not have the interest rate shocks that were building up in our system.
You could see that this is storing up problems that had to go wrong at some point. So this is why we said, 'hold on, everybody needs a home otherwise you store up issues for the future. Let's make that happen for the UK', which was very vulnerable. We had very high debt levels at very low interest rates and all variable rate.
That's when we decided to introduce long dated fixed rate mortgages, because like in other countries that will stabilise the country, help people onto the ladder and avoid problems in the future. Because it's a long term we're looking at.
Brendan Le Grange 4:46
You can see why this is such a stressful thing. You are still working the same job getting the same salary, living the same life and somewhere in a distant country there's been an economic crisis and suddenly your mortgage costs you 10% 20% 30% 40% 50% more per month.
And as I was preparing for this, I was thinking about innovation in the mortgage space and I wonder, buying a house - and obviously then getting the mortgage for that - is such a big step in everybody's life, there's so many things you need to do, and it's going to have such a big impact on the next couple of decades of your life that almost everybody who can, will speak to their parents about how to do it, will go and look for somebody who's bought a house a few years ago and asked them and you know, generally speaking, that's good, of course, but I wonder, does that carrying over of traditions also bring with it a few complications when it comes to to doing innovation: if you've lived in the UK your whole life, the structure of how UK mortgages are done, you can easily come to think of it as the only structure.
Arjan Verbeek 5:53
Making the decision to buy a house is an easy one, because most people want to own a home, 75% of people that don't own a home would like to have one. But nobody has the money just to buy one. People need to borrow and need to borrow a lot of money compared to the salary. So it's a decision that shouldn't be taken lightly. You should know what risks you take home. And that's why you have advisors, that's also why you talk to your parents.
But what people do, is they select a mortgage basically on price, the cheapest rate, the cheapest rate for two to five years. And what happens after two to five years after the period runs out, you go to a very high standard variable rate unless you refinance, but you can't really refinance earlier or move earlier because you have prepayment fees. So you're not flexible at all.
People think I'll take the offer for two years, because that's flexible. No, it's not. It's only flexible exactly on that two year point. Otherwise, you're tied in again, or you pay a very high rate. So it's a very inflexible market, with significant risks attached that are all put on the borrower.
But it works for the lenders, because the lenders fund older mortgages with deposits, which are short term. So they're very happy to give you all the risks, and they will give you very cheap loans for that the margin they make is not enough for the risk and the effort. They make their money by not paying savers. Deposits are not being remunerated, that's what the banks made that make their money. And that worked fine until the financial crisis came.
When the financial crisis came, the regulator's, rightly so, said we have too much debt, we have a lot of systemic risk here, we want everybody to look at how much a borrower can afford. It's all about affordability, it doesn't matter what the house is worth, you have to be able to pay the debt, which is absolutely correct. But the regulators say you have to be conservative and stress that which meant that a lot of people could not even afford the house they were living in. New borrowers, first time buyers couldn't borrow as much anymore as they could before the financial crisis. So they could not buy houses anymore, which people could buy before the financial crisis.
So the entire housing market is locked up.
That's why you're hear 'the problem is the deposits', but people don’t need to have to high deposit. Not really, because they only need a high deposit, because you can't lend them enough, because you put all the risks to them. You know, if you change your product into a long dated fixed, you protect the borrower, you can lend a higher amount, they need less of a deposit. Right? It all depends on how you explain things.
And this is what other countries have done for a long, long time: Denmark for over 200 years, the Netherlands for 40/ 50/ 60 years, the US obviously, after the savings and loans crisis, they started protecting borrowers by making long dated fixed rate mortgages the 'cool product', and that protected them over the crisis against these shocks. And that in turn, helps the economy.
So it really is important that you have a consumer focused affordability view instead of an asset based lending view that we that we have in the UK or used to have in the UK. So what we're doing by introducing these products is making the housing market work again, get people to minimise the deposit requirements and be able to buy a house again as they could before the financial crisis.
Brendan Le Grange 9:12
When we're in a high inflation world like we are now, the go-to defence by the economists is to increase interest rates. So cost of living is increasing, you know, the price of bread and milk is going up, also your mortgage rate's going up. And when you've got a fixed term interest rate, that doesn't impact you at all. From a user's point of view, it makes a lot more sense. But similarly, I'm wondering about regulators and the big dominant players, what did those incumbents think? What did those stakeholders think when you started your discussions?
Arjan Verbeek 9:46
Very mixed.
And we need education, education, education. You have people that say, 'oh, the consumers don't want them'. Well, they have never really asked their consumers. We have asked, and the consumers absolutely love them for the normal reasons, all that stability and security is important. Borrowers do not want to refinance and pay fees every two years, they do not like spending weekends and weekends on their mortgage application, it really is not their hobby, they want a home, they don't like taking a mortgage.
What is key, though, and that came out of our discussions, they want flexibility. They want flexibility to be able to change their mortgage to be able to lower the interest, if it's in their benefit, they want to refinance to a lower rate, obviously, and they want to move house. So it is important that that flexibility is there in the product.
A lot of people say oh, it's more expensive, well, you get a different product, you're not being given all the risks that all the other products have, you'll get flexibility, you've got certainty, and you can borrow more money, right? It's different than your two year, teaser rate, cheap, cheap, cheap, there is a price to pay for that. But it's it gives you a lot of value. And that value is appreciated, because the consumers also told us they're willing to pay for that.
Now, that explanation to the stakeholders in the market, which are the intermediaries that are used to doing one thing, it's hard to change. And let's be honest, change is difficult for everybody. The lenders, the manufacturers of the mortgage products, they will deposit funds, our market is completely deposit funded change, it's very difficult to change his heart, they have to change the business model. So they resisted. But increasingly, people are beginning to realise what's wrong with the market. And the regulator's love it they know it they know the risk of high leverage, they know how good it would be to lock in that risk for consumers.
But they're not here to make the market. They control the market from a risk point of view, but they don't drive the market into a certain direction through regulation.
That's the government's job. And we're very happy to see that the government now is beginning to say hold on a second. The housing market is not working properly, long, dated, fixed, seem to make that work again and unlocked the housing market because we've given them a lot of evidence. Let's focus on it. And you've seen The Conservatives have made statements with respect to long dated fixed rate mortgages. And last Saturday, I think it was, Labour also came up with long dated fixed rate mortgages.
The market is beginning slowly but surely to embrace it, but it's challenging. It takes a lot of education.
And everybody loves to be second. I've been talking about this for 10 years or more. And this is really good. This is what we need to do. And says yeah, you do it first. So me and a few colleagues, we just decided, okay, we'll do it first.
And we we fully expect that the snowball to start rolling and others to jump on the bandwagon once the benefits are there and people can see it unlocks the market. People also need to see that this is not a competitor to what's there. Because the number of mortgages outstanding, has shrunk since the financial crisis, because people can't get on the level. There's no more loans coming to the market. That's what we thought we grow the entire pie, right work with us and the market gets bigger again.
Brendan Le Grange 13:16
And I think that's also key in that balance between the cost of the credit versus the accumulation of wealth. Because it sometimes does get looked at too in isolation in that for a big group of the market. The question isn't, I'm going to take a Mortgage A or or Mortgage B to buy this house, it's can I get the mortgage to buy the house or do I rent for another year? You know, you've paying a rent and you're trying to save for a down payment.
So when we look at what are the costs benefits, it's not simply over a given period of time over the life of a given loan, what would pay the highest total interest. And in the UK just said you'll get teaser rates or somebody might offer you a really low rate, but they have to stress test at the normal rate plus a given percentage, because maybe interest rates will rise.
Whereas if you guarantee that interest rate, you take away that need for the buffer in the stress tests, and that's kind of how you can get people to borrow more. It's not just that you're stretching it over a slightly longer period.
Arjan Verbeek 14:20
That's correct.
Generally the big lenders that control the market with cheap rates that revert to an SVR average SVR is probably 7% or 8%. The minimum stress they apply is 1%. Over that so call it 8% - 9%. If you can borrow at six that means that you can borrow 30 to 40% more purely by removing that risk. That is the difference between buying a house and not buying a house.
And by the way, it's not a choice shall wait one year, depending on circumstances it might be that's a choice of waiting 20 years and you can't choose where you're going to live and how long you're going to live and when you're going to live but you need to make the best out of that period. And we give people that choice and the flexibility. So it's worth it.
People look at the total cost of borrowing, but then they ignore the house price inflation, but also the fact that they have to save less for their pension. If you haven't, if you are not a homeowner, at the moment you retire, you probably need to increase your pension pot by 300k 400k to pay rent for the 25ish years that you're live. And you have no security, what rents are going to be at that point in time. So the quality of life is just so affected by not owning your home.
Brendan Le Grange 15:41
Yeah, when I left South Africa, so 2009, we spent the next 12/ 13 years renting around the world. And as a renter, you've got the cost of moving, you've got the stress of finding and settling into new houses every time, if you've got kids in schools, you're looking at Oh, can I still afford to rent in the area that kids are in school? Yeah, I think that's just full of benefits, if we can get that right, so let's talk a bit about how you're doing that.
Arjan Verbeek 16:06
The product has to be long dated, fixed and flexible, to make it a success.
To fund a long dated fixed rate mortgage with deposit is very, very difficult. And especially when you have to offer the flexibility because you the banks would need to use complex derivatives, etc. So it is important that you get the funding model, which taps into the insurance companies and pension funds that need that long dated stable income that a mortgage is because you have a person paying £500 a month and someone receiving £500 a month and pension. It's a perfect match. Very stable matching asset.
What we do is we've we've designed a new bank to the UK, not new everywhere, but just new to the UK based on what we've seen in Denmark and Germany, for example. And that bank, Perenna Bank, will issue long dated bonds secured matching the long dated mortgages that are going to lend.
And the benefits of that from the system are immense as well, because you stabilise the risk, it's domestic assets being funded by domestic investments.
It is boosting GDP, too, let's not forget that housing is probably 15 to 20% of GDP, not just construction, but also the tradesmen, you know, everything that goes around it. But they also need to be sold. At the moment, you know, there are no houses being sold because people don't have the ability. So by connecting that we make the housing market work again, more houses will be built, and the economy is there. So we're really just connecting supply and demand and make it work.
And from a distribution point of view, we don't really want to do this ourselves, we have a funding model that is unique, but we want to work with other stakeholders in the market that don't have access to that funding.
So yes, we go through the brokers, brokers have a very important role to play. The good ones will pick it up the bad ones that say, oh, people don't want it, and I'm not going to teach myself or learn, they will probably just disappear. Others will just embrace it. And we see a lot of people embracing it will go direct to consumer.
But most importantly, we are going to work with other lenders and with other touch points, you know, other consumer brands that want to create awareness, other housing related touch points with the consumer, so that they see what they can get from from our from our mortgages that helps improve the quality of their life, because that's what it's all about. It's about increasing quality of life, reduce stress levels, and live safely, right, not losing your house.
Brendan Le Grange 18:45
And what about that, that flexibility if people are taking a mortgage right now, and they're looking backwards, and they say, okay, but five years ago, interest rates are 1%. What if that environment returns, you know, am I stuck in here for 30-40 years.
Arjan Verbeek 19:02
If people were lucky enough to have a 30 year mortgage, when interest rates at 2%, then obviously, they don't want to prepay that ever. So we give people then the opportunity to take that mortgage with them to other houses and borrow more so that they have that benefit.
That's the portability of the product.
We also give people the ability and this is new to the UK to leave the mortgage with the house. You know how long it takes to buy and sell a house. So the buyer of the house doesn't have to go and get a mortgage or can have a top up from us assuming that the credit is all okay and take over the mortgage. So you speed up the process.
If you take a mortgage out in a higher rate environment like now, yes, for five years, there are early redemption charges. But after five years, you can do whatever you like you can take it with you, you can leave it if interest rates have not come down. If they have come down you just refinance to the lower interest rate. You're free to do that. And then if you refinance to a lower interest rate with us, you've got it for another 30 years.
So you're always in the driving seat.
And I don't know whether you remember, but there were a no 90-95% loan to value mortgages just after the crisis. So if you had mortgage debt and and you needed to refinance, there was no product, you are going to the standard variable, right, and you will pay a lot, a lot of money, right? That can never happen. You're completely secure, you are in control of your own destiny.
Brendan Le Grange 20:30
And I think that portability, too... now, I'm veering into some areas, I don't know all that well, but... from memory of reading some stuff in the US, that is sometimes a problem with the US fixed term mortgages. There, many people lack that portability. So they've got a great interest rate, they've got it fixed but because the loans didn't allow them to carry that on to a new house, they staying put.
Earlier you talked about the average family being able to afford the average hous., I think the average family isn't looking to do all sorts of clever financing tricks to maximise this, and they're most people want to have mortgage payment they know they can afford at their pay every month for the house they live in, and not spending their time watching the the global financial indexes to see which way things are moving at any given time. So I think I just said like, as soon as people are aware of it, there's going to be a great deal of interest.
And I see that you are scaling up and really building to meet that demand. I went to https://perenna.com/, I see you're recruiting a lot of staff, building up the team. So as we sit here, it's still in January of 2024: what are your plans for the year ahead? Where are you looking to take this new bank?
Arjan Verbeek 21:41
Our goal is to unlock the housing market and do it collaboratively with all other lenders and stakeholders in the market. So we really are growing, we see our direct to consumer, or via broker interest really coming to the fore. And the market is slowly changing, they're beginning to see the benefits, we see other lenders willing to partner, we definitely have interest from the insurance companies to buy our bonds from a funding point of view.
So all of that is really going well. And I think we'll see a real increase in momentum. We also see the politicians, the old guard and the new guard, housing is important for everybody across the parties, and they are beginning to understand it. And we do not need government balance sheet, right, the government can do certain things to help people there are adjustments that could help the market develop quicker, faster, more efficient, better for consumers. And that's what we're talking to the government about.
But they don't have to do anything, the snowball has started to roll and the benefits are clear. So 2024 is going to be the year that long dated, fixed rate mortgages are going to be accepted in the UK as as a product that really meets the demand of specific segments, particularly home buyers, and particularly first time buyers, but also people over 50 and 55. Because let's not forget that I can't get a mortgage anymore, because of age limits or other requirements borrowing into retirement, it's very difficult on the floating rate, a lot of people will need to read borrow to top up their pension pots, but also to retrofit the houses we have an energy crisis, our products are perfect to, to retrofit a house make it energy efficient, and the energy savings often offset the cost of the borrowing.
So it's a win win.
There is so much we can do. And we can't do this by ourselves. And we don't want to do this by ourselves. We want to do it with the entire industry. And I think this is the point where the industry in 2024 is going to open up we're not competing with everybody we're working with people to do to make this happen.
Brendan Le Grange 23:45
You know, you're buying a house, you know you're going to stretch but you want that abilities I'm stretching and when of two, three years, you know we're eating bread and butter, we're gonna budget as tight as can be for a while and we're going to then you know, we established ourselves, we're going to save and we're going to grow into this house. But with variable rates as much as you could say, okay, we were going to save everything we can we're going to stretch our budget, we can just afford this house. They say okay, but can you afford this house if interest rates rise 2% - 3% - 4% And so you're not getting the house.
So I'm definitely gonna be watching the story with great interest. I'm sure others listening are going to be doing the same.
And I first found you on LinkedIn, you you share a lot of great insights from yourself, but also a lot of really well curated articles in the space. If people want to find you and to follow that, but also if they want to learn more about Perenna, where are different places they can go online to stay in touch?
Arjan Verbeek 24:42
Well, obviously there's www.perenna.com where you find a lot of information - there are calculators on there and increasingly it'll be more material to to show people the value of owning a home and of long dated fixed rate mortgages.
On LinkedIn out of my own profile, I try to do the education and the value-add, the calculated scientific way behind it. Obviously, we have all the information to stakeholders out of the Perenna LinkedIn page. And we are on all the social platforms that you find.
We have a great team that keeps that up to date. And it seems to work because engagement is increasing very, very rapidly. So your heart is when your home is, and we really believe that.
Brendan Le Grange 25:23
Yeah, and there's, as I said earlier, lots of roles you're recruiting for as well. So I will put links to the website to the socials in the show notes as well. But I am thank you again for your time. As I said, genuinely, I think this is one of the the areas where lending and lending smartly, can make a big difference to the whole country. So very excited to have been speaking to you today.
Arjan Verbeek 25:45
Thank you very much.
Brendan Le Grange 25:47
And thank you all for listening.
Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is written and recorded by myself Brendan le Grange in Brighton, England and edited by Fina Charleson of FC Productions.
Show music is by Iam_wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show and I'll see you again next Thursday.