While the persistent imbalance of supply and demand continues to create a challenging environment for the UK housing market, the consistent performance of the underlying mortgage assets has ensured that UK RMBS remains a stable lynchpin within capital markets. This resilience has made the sector a reliable choice for investors, even amid broader market uncertainties.
As new entrants to the RMBS market following Lenvi’s recent achievement of an RPS2- Fitch rating, we’ve been closely monitoring market sentiment. One question that continues to surface for us is whether the market is simply benefiting from an ‘if it isn’t broke, don’t fix it’ mentality, or if it has, in fact, stagnated.
Looking to other thriving, international RMBS markets and considering the makeup of their success, in this article I pose whether long-term fixed rate mortgages (LTFRMs) could renovate the UK mortgage market and improve market value.
The UK mortgage landscape
Recent years have seen a resurgence in UK mortgage lending, with first-time buyer activity and home mover numbers rising sharply in Q1 2025 driven by a lower-interest rate environment and the end of the SDLT holiday. However, UK Finance predictions for Q2 expect a significant drop in activity as a result of many buyers having brought forward transactions to take advantage of lower tax costs.
Meanwhile, the RMBS market has continued to thrive, with renewed activity, a wave of new issuers, and increased competition from non-bank lenders and challenger banks.
Yet, the structure of mortgage products in the UK remains largely unchanged. The vast majority of borrowers have opted for 2- or 5-year fixed rates, prioritising repayment affordability over protection from rate exposure.
Lessons from international neighbours
The prevalence of LTFRMs varies widely across international markets.
In the US, France, and Belgium, long-term fixed rate products are more established as market structures better support their offering. For instance, the US has a well-developed system of securitisation and state-backed institutions that make it easier for lenders to offer LTFRMs.
The Netherlands
Similarly for the Netherlands, state support such as that provided by the National Mortgage Guarantee (NHG) provide borrowers with additional protection from economic shifts and offer more favourable rates. The portability of Dutch mortgage products also improves the attractiveness of longer-term mortgage commitments.
Japan
State-backed or “public to private” support for long-term fixed rate mortgages (LTFRMs) is common in regions with high LTFRM uptake, typically introduced to meet local demand for financial security. In Japan, the government established the Japan Housing Finance Agency (JHF) to promote stable housing finance, launching the Flat 35 program in 2003. This initiative, in partnership with private lenders, offers fixed-rate mortgages up to ¥80 million for 35 years.
Despite major global changes since its launch, the initiative has largely achieved its goal of promoting homeownership – particularly to consumers seeking long-term stability – accounting for 10% of Japanese home mortgages. In recent years, however, declining applications, rising interest rates, and historical fraud issues have challenged its appeal. Yet, it’s thought that some of these challenges have been reflective of broader market constraints rather than the program’s failure.
Flat 35’s ongoing relevance depends on its adaptability. Since 2023, it has incorporated energy-saving requirements, expanded its offering to include reverse mortgages for over-60s, and included financing for Homeowners Associations to align with evolving policy goals.
This example shows that introducing LTFRMs alone does not automatically increase home ownership or create an untapped market for new and reliable revenue streams. Success depends on cultural preferences, regulatory frameworks, funding models, and continuous adaptations to new market dynamics.
Investor and issuer considerations
From an RMBS perspective, the UK market is robust and continues to offer attractive risk-adjusted returns, especially as yields in other asset classes struggle.
But would a shift to LTFRMs fundamentally change the risk profile for issuers and investors?
The answer is surely complex.
- On one hand, LTFRMs could reduce prepayment risk and provide more stable cash flows for securitisation structures.
- On the other, they introduce new challenges around interest rate risk management and product pricing, particularly given the UK consumer’s historical preference for flexibility and the ability to re-mortgage frequently.
- Not to mention the competitive nature of the UK market, combined with historically tight interest margins, make it difficult for new or smaller lenders to compete on price with established short-term products.
Long-term fixed-rate mortgages are not a novel idea to UK markets. Introduced to the market in the late 1980s with the launch of a 25-year, 11.95% rated product by Mortgage Funding Corporation in 1987. Nevertheless, uptake in recent years has been consistently low with only around 1% of recent residential mortgage completions have been fixed for more than five years.
There are early signs of change, however. Some lenders are beginning to offer longer-term fixed products – such as Halifax’s 10-year fixed rate deal offering rates of min. 5.55% on a 60% loan-to-value (LTV). Additionally, political interest in mortgage market reform is growing, with the Labour government making it a key priority since coming into office in 2024. The upcoming Spending Review on 11th June 2025 may further indicate government intentions in this area.
Yet, for now, uptake for long-term offerings remains low, and consumer awareness of LTFRMs appears limited.
The question, then, is not just whether LTFRMs are a solution to market stagnation, but whether the UK market - borrowers, brokers, issuers, and investors - is ready to embrace them?
Could the introduction of more LTFRMs create a shake-up in this established market and spark a wave of innovation? or will entrenched behaviours and preferences, not to mention structural barriers keep the status quo intact?
As a new player in the RMBS space, we’re interested to hear your thoughts!
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