Liz Truss mini-Budget in 2022<\/a>, which sent average mortgage rates flying upwards by around 2 percentage points with hundreds of products pulled from the market. <\/p>\nAnd sudden increases in rates have been common since. Most noticeably when inflation remained stubbornly high in the summer of 2023, and two year deals peaked at 6.85 per cent on average.<\/p>\n
So when these mini-mortgage crises are becoming a common occurrence, why do British households continue to take the gamble?<\/p>\n
Over the past seven years collectively, UK Finance data shows that more than nine in 10 new mortgages were taken out on fixes between two and five years. Meanwhile, fixed deals of over five years make up around just two per cent of the market.<\/p>\n
It means that, although most households know what their bills are now, in half a decades\u2019 time or less, they face the unknown. Whilst rates could come down, there is also the risk they increase significantly. <\/p>\n
But it doesn\u2019t have to be this way. Other major economies, the United States being the key example, operate on dramatically different systems, where fixing your mortgage rate \u2013 and guaranteeing your monthly bills \u2013 for the lifetime of your home loan is commonplace.<\/p>\n
This avoids the biennial panic and market monitoring some in the UK face.<\/p>\n
So why doesn\u2019t the British mortgage system follow the example from across the pond, and move towards a system where 30-year fixed mortgages become the norm \u2013 protecting us from so-called \u201cblack swan\u201d events like the Iran war, which can shock financial systems?<\/p>\n
Why does the US system differ from the UK?<\/p>\n
Around 90 per cent of US mortgages are sold on 30-year fixed rates.<\/p>\n
\u201cIt is extremely uncommon for the initial term of a mortgage to be under five years,\u201d explains Michael Fratantoni, chief economist at the Mortgage Bankers Association, the trade group representing the real estate finance industry in the United States.<\/p>\n
Some high-income individuals do take what are known as adjustable rates \u2013 similar to fixes here in the UK \u2013 but these tend to be for around seven years.<\/p>\n
Part of the reason for the difference in the UK and US systems is the way that mortgages are funded.<\/p>\n
In the UK, when someone takes out a mortgage with a bank, it tends to keep the loan on their balance sheet and fund it using customer deposits \u2013 mainly savings.<\/p>\n
This is relatively straightforward if you\u2019re selling a rate for two or five years \u2013 you can probably predict what sort of income you\u2019ll have coming in \u2013 but it\u2019s more difficult looking 30 years ahead.<\/p>\n
In the US, most banks use something known as securitisation. Essentially, pools of mortgages are packaged together and sold as investments, so they\u2019re no longer the problem of the lender.<\/p>\n
The US has set up an entire system for this. Two government-sponsored enterprises, colloquially known as Freddie Mac and Fannie Mae, buy mortgages, pool them into these investments \u2013 securities \u2013 and sell them to private investors.<\/p>\n
Three quarters of US mortgages operate this way.<\/p>\n
\u201cWe\u2019ve created this whole structure to support this market,\u201d explains Fratantoni.<\/p>\n
\u201cIf you have a bank-based system like in the UK, you\u2019ll necessarily lean towards more [shorter fixed or variable rates] or you\u2019re putting too much stress, in terms of asset liability management, on the banks,\u201d he says.<\/p>\n
What does it mean for households?<\/p>\n
In the US, most households take on these 30-year loans, but they do pay higher rates than UK customers do, in general.<\/p>\n
Rates still fluctuate, but it means once locked in, US households that already have mortgages are protected from things like the current inflation crisis, which can send mortgages upwards in price.<\/p>\n
Borrowers can refinance, unlike in the UK where you are usually tied into your fix for its duration.<\/p>\n
The US sees large numbers of people refinancing when rates drop, although they never get as low as they do in the UK.<\/p>\n
\u201cThe expectation is a borrower getting a fix at 6.5 per cent today will have opportunities to refinance at a lower rate. What we see in the US is these refinancing waves. When rates drop they all refinance at once \u2013 we get enormous amounts of activity,\u201d explains Fratantoni.<\/p>\n
\u201cBut there\u2019s no free lunch, investors are going to asked to get paid for this,\u201d he says.<\/p>\n
This is reflected in the rates. In summer 2020, as interest rates dropped globally for the pandemic, UK rates could be locked in for below 2 per cent.<\/p>\n
Average two-year rates in the UK reached 1.99 per cent. At the same time, US figures from the Freddie Mac suggest average rates were around 3 per cent.<\/p>\n
Would Britons take US style mortgages?<\/p>\n
Longer fixed rates mortgages in the UK do exist \u2013 with the likes of April Mortgages and Perenna offering them \u2013 but they are uncommon.<\/p>\n
\u201cFor a bank to fund a longer duration fix, it will either charge a premium it views matching the internal funding risk, or have assets that match the maturity. This in part explains the prevalence of two, three and five-year fixed rates in the UK,\u201d explains Peter Stimson, head of mortgages at UK lender MPowered.<\/p>\n
When they are offered, they have not tended to be massively popular.<\/p>\n
Chris Sykes, property finance specialist at MSP Financial Solutions, explains: \u201cThe flaw of these long terms rates is the premium charged on them. Often this premium is 1 per cent over a two or five-year fixed rates on the market, on a \u00a3350,000 mortgage that is \u00a33,500 per year, or around \u00a3291 per month.<\/p>\n
\u201cThat is a hard pill to swallow for many when they are having to stretch themselves just to get on the ladder.\u201d<\/p>\n
Sykes says there is a place in the market for these products, and he has some customers on them.<\/p>\n
\u201cClients who took these back when the rate you could achieve on them was 2 or 3 per cent are now laughing. I just can\u2019t see them being wildly popular until we are in a stable lower rate environment, or they came down in price,\u201d he says.<\/p>\n
Rachael Hunnisett, director of Mortgage Distribution at April Mortgages says she believes that longer fixes can \u201cplay an important role\u201d in stopping some of the payment shocks seem in recent years.<\/p>\n
She accepts that rates are higher than some of the shorter fixes on the market but argues \u201cthe value of certainty, avoiding repeated refinancing costs, and reducing exposure to rate spikes can mean they deliver better overall value.\u201d<\/p>\n
Asked which system is better Fratantoni says \u201cthere are trade offs to both systems.\u201d<\/p>\n
\u201cBut in a world where rates fluctuate quite a bit, the US consumer benefits from this 30-year fix. They have the protection but the opportunity to refinance,\u201d he adds.<\/p>\n","protected":false},"excerpt":{"rendered":"This year, hundreds of thousands of homeowners will be hit with a financial shock. Around 1.6 million fixed…\n","protected":false},"author":2,"featured_media":32124,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[154,363,3847,152,5,6],"class_list":{"0":"post-32123","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-uk","8":"tag-housing","9":"tag-liz-truss","10":"tag-mortgages","11":"tag-property","12":"tag-uk","13":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/116544094988821716","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/32123","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=32123"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/32123\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/32124"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=32123"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=32123"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=32123"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}