I have published this video this morning. In it, I argue that Labour could demand that every mortgage provider in the UK should have a fixed rate mortgage for the rest of a loan's life available to borrowers so that never again should people be caught out on the whim of the Bank of England. It would cost Labour nothing but it would provide certainty to millions of people's lives.
The audio version of this video is here:
The transcript is:
I'm making a series of videos to explain how Labour, as a new government, could change some of the rules that apply in the UK to make life better for millions of people.
Let me suggest yet another way in which they could do this at no cost to themselves.
As we've seen over the last few years, variable interest rates on mortgages have caught millions of households out when it happened that interest rates were increased by the Bank of England through no fault of the borrowers of those funds who had taken out a mortgage to buy their own home.
As a consequence, those people became pawns in the game of supposedly controlling inflation. We can argue elsewhere about whether that had any impact on controlling inflation, and I'll give you a little hint. I don't think it did. But what we can say with certainty is that this helped create the cost-of-living crisis that has caused misery for millions of UK households.
Now, why is it that in the UK we don't have what is available in the USA, which is a mortgage with a fixed interest rate for its entire life?
Labour could demand this from UK banks. It could make the offer of such a mortgage at a sensible interest rate a condition of the banking licence, which every bank must have as a condition of trading.
In other words, it can impose this requirement on every bank, building society or other company that provides mortgages in this country.
Straightforwardly, simply, it could say, you will make available a mortgage offer, which over a period of 25 years, 30 years, 40 years, or whatever the chosen mortgage term is, the interest rate will be fixed and so, therefore, will be the monthly repayment for life, so that a person or family taking out this obligation will know forever what they have to pay, and will never be caught out in the way that millions have been as a consequence of the unnecessary imposition of high interest rates by the Bank of England over recent years.
It could do that because this will provide certainty to people in a way that very little else could with regard to their personal finances. Surely, Labour, you would want to deliver that. Come on, let's do it.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
A litmus test for Scammer & Co. They’ll definitely flunk it in my view being deeply corrupt!
Like fannie mae and freddie mac in the USA?
I only realised how they worked a couple of years ago. Seems very un -capitalist for the USA.
The Thatcher Housing revolution may have benefitted some but overall I think it has been a disaster, especially for young people.
It needs to be unravelled. This measure, with other social housing measures such as the sort of rent controls one sees in some other European countries, could make a huge difference to millions of people.
Just like them
I had been thinking the same for a while.
I was coming at it from the other end but the obvious thing to add is that the loan should include some sort of ‘Mortgage Insurance’ against sickness, redundancy etc.
May I add that I think that this needs to be worked up into some sort of product/scheme in terms of how much you can borrow, for what sort of houses and should it include the ability to borrow for maintenence and improvements?
I would also add that it needs to be part of a plan to bring sanity back to the Housing Market
Neat idea
Fixed rate mortgages for individuals are the norm in the US. However, there are two key features to the market.
First, loans can be repaid early at face value at the option of the borrower. For investors this creates problems but it does still work. It also means the that 30 year mortgages are at 7% while 30 year Treasuries are at 4.5%.
If this pricing prevailed in the UK, how many takers would there be? Not too many.
Second, the market only works because of government involvement via FNMA, FHLMC etc. We don’t have equivalent institutions in the UK.
So, I am not so sure this is worth pursuing.
We could have such institutions in the UK
I think it definitely worth pursuing
It may not get many takers
It would get them though
It’s been tried about 3 times over my career and never taken off. Fixed rates out to about 5 years are reasonably easily risk managed and the market quite competitive. Average 5 year rate is 5% at the moment…. so 7% which is where a 30 year would be priced looks unattractive….. because the cost of managing the risk is higher and everyone underestimates the cost associated with prepayment risk.
I am all in favour of a State bank and it could help do this business…. but that won’t happen soon.
But the aspiration would make sense
“Fixed rate mortgages for individuals are the norm in the US.”
@Richard
You are correct! If fixed rate mortgages work in the USA they could work in in the UK. You always look for the possible and fixed rate mortgages are possible.
That is what I think
Fixed-rate mortgages used to be available in the UK. This extract discusses 1955:
“We offered him our maximum, the princely sum of £4500, which he accepted. At the time the nation was in the middle of one of its recurrent credit squeezes and raising money was very difficult indeed, but the Scottish Equitable Insurance Society offered me an endowment mortgage. It was to be a policy without profits and the interest was fixed at 3.5 per cent, payable for 30 years.” — The NHS – Beginning, Middle and End?: The Autobiography of Dr John Marks (May 2008) https://amzn.eu/d/0aTvf3or
My father got one in 1959 for 25 years and laughed ever afterwards.
This comment, and the discussion with Clive above describe very different worlds. There is a lot here that needs to be unpacked. I wonder if the problem Clive identifies; the higher rate charged on fixed rate makes them unattractive, and the rates are unattractive because, “the cost of managing the risk is higher and everyone underestimates the cost associated with prepayment risk”, requires to be more closely examined. The risks are a function, at least in part of the risks associated with lending to the specific borrower.
Here, I would suggest that in the UK in the 1950s lenders knew much more about the people to whom they lent. The structure of banks and building societies were closely integrated into their communities. They knew well to whom they lent. It may have been a little narrow, but it was safe. We have opened it up a great deal; but not always led by responsible lending. I would suggest the spread is a function of too much risk of irresponsible risk being taken by lenders. The risks, at least in part are wider because the “market” is now a loose circus in which there is reliance on ‘credit scores’, and digital information of whatever, perhaps over-hyped reliability; and the lenders are centralising around cheap digital platforms to enhance profits, and have completely abandoned their place in communities. They know very little about anyone now, they have abstracted themselves from people for spreadsheets and (often ropy) statistics; the proof of that is in the spread. The proof of the casual ignorance of lenders to those to whom they lent was established in 2007-8 (not least in the American mortgage market, with huge political reverberations, which we can still see in the US). I am slightly disconcerted by the assumption that we should just take the ‘spread’ being offered as if it was an unchallengeable force of nature.
Thanks
To think about
John, you are right about lenders not being close to the communities to which they lend IS a problem. In Germany there is a network of Sparekassen, local Savings Banks that one might equate to our Building Societies of 50+ years ago. It seems to serve them well.
On the narrow issue of mortgages. longer term fixed rate mortgages are dearer not because of credit risk – the credit risk is a function of the term of the loan (and although people talk of a “2 year fix”, the loan is actually 30 years) and the quality of the borrower and collateral, not the “structure” of interest rates. the 7% 30 year fixed rate reflects (mainly) prepayment risk. If rates fall then borrowers can repay their mortgage early and refinance at a lower rate. Investors that thought they had a decent fixed rate for 30 years find they get repaid early and have to invest at a lower rate. Of course, if rates rise there is no early repayment; the risk is asymmetric and investors demand higher rates to bear this risk.
One could structure things to not allow early repayment but what happens if the borrower sells the house or dies? You could allow a repayment penalty to compensate but if (say) I took out a mortgage in 2005 and wanted to repay in 2020 I might have to repay 150% of the outstanding principle! There would be an outcry.
Of course, as Richard says, it CAN be done…. but when faced with 5% for 5 years or 7% for 30 years (which is roughly where current pricing would be) almost everyone would choose the lower rate. Indeed, one of the major developments in the US over the last 20 years is the increasing use of ARMs (Adjustable Rate Mortgages) instead of 30 year fixed rate loans. I am all in favour of offering choice to borrowers… but don’t expect a huge rush of interest when faced with the true costs.
I can’t see why the risks can’t be hedged
After all, all we’re talking about is protecting the consumer against asymmetric risk so-obviously currently stacked against them.
Why is a model of symmetric risk do hard to create?
Thanks, Clive; a fair point, but the asymmetries I suspect, are not themselves symmetrical (and benefit the lender). But even if they are symmetrical asymmetries, the lenders should be more creative about offering suites of mortgage and rate packages that fit real life; and that reflect the total risk across all their mortgages. Perhaps we should think much more about the borrower in the longer term. If the private sector can’t rise to the challenge, then that is proof we have lost more than we gained with the end of building societies, and the great mutual funds. An imaginative Government and Treasury should be fi;ling the gap, if it is beyond the private sector banks. In short, I suspect we have what we have because it suits the commercial lenders too well, and they are too complacent.
I tend to agree
Richard, yes the risk can be hedged… there is a market in Bermudan swaptions (the hedging instrument); it is not that liquid in GBP but can be traded.
However, the cost of the option is high and experience suggests that borrowers baulk at paying the cost. I am just not sure it is worth all the time/effort/expense to offer a product that is unlikely to get much interest. Would you really choose a 30 year fixed rate at 7% versus 5 years at 5% right now? I would not.
Now, if you are proposing that government subsidizes mortgages for house buyers (by bringing the 7% down to 6% then you should say so…. but I suspect that is not what you are suggesting.
I never planned a 7% mortgage. We should not have 5% mortgages. They need be no more than 2%. So might I pay 4% instead? Yes, is the answer.
Clive, we have the “free market” in housing; and the oldest, worst housing stock in Europe; ill-conceived new product (expensive, old-fashioned housing estates, often with poor insulation, and even sometimes built on flood plains); a growing population and shrinking new home supply; nimby-driven planning legislation, and a rapid rise in homelessness. The biggest driver of house price rises (where most people assemble any wealth in Britain – it isn’t generally from work!) in the UK is a free market in housing, a growing population and declining supply.
Here is the potted history. Private property rights always dominate the use of land. Compulsory purchase, even of long dead sites, killing city centres is almost impossible. We turn Britain into a nation of badly planned suburbs. We keep the supply low, and the demand ever growing. Endless price rises fall out of the bottom, except when the market even makes a mess of that, and there is a bust. It is not a law of nature that everyone owns their own house; it doesn’t apply throughout Europe, historically it was not an obsession in Scotland; it is a product of Locke’s muddled theory of “freedom”, but if you are going to have a principle that everyone can own a home, you do not build it round a free market. Government would have to make it a policy purpose – and that means providing it with support, and that means both providing adequate, affordable social housing to stop homelessness, and tax and planning advantages or subsidies to support ownership. The market will never do it on its own.
Agreed
John, I completely agree that housing provision in the UK is a mess. But fixed rate mortgages won’t solve any of those issues.
Richard, let’s not confuse the provision of fixed rate mortgages with the fact that rates are at the wrong level. If short rates were at 2% with long gilts at 3% we would probably see 30 year fixed mortgages offered about 5%. If you wanted them priced at 4% it would involve government subsidy… money far better spent building Social Housing.
Ok, but if gilt rate is 3% the state could offer mortgages at very little more.
So, my mistake (if I have made one) is not to say that.
Why would the state need a 2% margin? A little, but 2%? These are fully securitised in multiple ways after all.
…. the extra cost is the cost of the option that is embedded in the terms of the mortgage – the right to repay at face value at any point. THIS is the rub – there is a free market in these options and they are fairly priced… but in my experience very few people choose to pay for this option….. with overnight rates at 2%, 30 year gilt rates at 3% you will get 5 year fixed 3.5% ish and 30 year fixed at about 5%. In my experience virtually everyone takes the low rate.
But why not make the 30 year available? I still haven’t heard an answer to that
In context the Conservatives reduced the MIRAS tax relief on mortgages in 1994, 1995 and 1997; and Labour ended it in 2000. The assumption, not without reason was that it had become too much of a subsidy to homeowners already benefitting hugely from the increase in the capital value of their homes. The problem was, it didn’t just stop feather-bedding those benefitting from large, tax-free capital gains on their home, at the high or middle levels of the property market; but given the problem of supply, and a slow rise in earnings it has squeezed people out of the bottom of the market (save some ad-hoc market-oriented Help to Buy schemes that failed to address the scale, or systemic nature of the problem).
Judiciously capped tax reliefs and subsidised long-term market rates, perhaps with carefully worked out options for different, quite understandable scenarios (growing families, or downsizing for changed circumstances, for example) should be considered. If the commercial banks can’t do it, then Government support for the mutual industry (destroyed by Thatcher in a political environment celebrating nothing more than a scandalous superfluity of wanton greed; I remember watching the fall of the great Scottish Mutuals with incredulous horror at the utter, cynical stupidty).
Why should mortgage payments have tax relief, but not rental payments? Especially when those paying mortgages had something to show at the end?
Both are essential to good lives
Both need subsidy
What does not need subsidy is private landlords
See my comment below. The answer to your question is that ever sine Thatcher changed the whole environment on housing to property owning and Right to Buy; the British electorate have voted for it, and social housing has been kicked into the long grass. Changing that is generational; I will not live to see it accomplished, even if you start today; and Labour isn’t starting todat. We are where we are; worshippers of owning property, and even “property ladders”; living in a property is away down the priority list. We have to fix the problem from where we are; not from where you wish us to be. We can cap subsidy, but if we don’t embrace it, we will remain where we are; nowhere.
“If you wanted them priced at 4% it would involve government subsidy… money far better spent building Social Housing”.
Well, that would be fine, if there was not deep hostility to social housing; the obsession with home ownership (even more than the passing phenomenon of the ‘winter of discontent’) was absolutely central to Thatcher’s success; the property owners, given the ‘right to buy’ with the purpose of turning traditional Labour supporters into Conservatives (remember the Westminster Council scandal?). The problem was that just like the error over subsidising ownership, the stock of social housing anyone wanted to live in, has vanished. The Thatcher transformation means the voting public largely turned against spending money on social housing. It isn’t coming back anytime soon. sometimes you have to lie in the bed you made; because we are in no condition to change it; and Labour are very, very easily spooked by the private sector.
You can’t conjure the answer out of thin air. Do you really think the choice people want is social housing, or private housing many will never afford to buy? That is your answer; to make it easy for mortgage lenders to make easy money? We really have to make up your mind what we want. We do not start from where we want to be; we are staring, deep in a hole. It is all very well to discuss the mechanics of funding in the private sector, but it doesn’t actually solve the problem – does it?
First you have to decide what you are trying to achieve; and then create the environment that will achieve it. Our mess in housing is now so bad, we need to rebuild everything; social and private housing. I submit the only way out in Britain, given the mess we created, is that we have to provide both; and that means providing the resources at prices people can afford; and the private sector, will never, ever do it – because they are rehearsing your arguments on rates and risks constantly. yet the private sector wants to invest in property, because it is lower risk than almost everything else.
I like that
They are not available because there is no demand for them at a fair market price (currently 7%). Of course, everyone wants one if the rate is attractive….. but it just never is.
Now, there are huge problems in housing and John Warren has identified many….indeed, some are related to finance. However, none are linked to the failure to fix a rate for 30 years as opposed to 5 years.
But you never answer the question as to how the US delivers this, Clive.
I know all about Freddie Mae and Fannie Mac. What is stopping is doing this?
The short answer is that the US capital markets are far deeper and US banks far more innovative. Reproducing that in the UK is, of course, possible… but is it worth it?
In passing, I would note a couple of things about the US.
First, rising rates have led to reduced mobility as nobody wants to give up their low rate mortgage.
Second, there has been a secular shift towards floating rate mortgages in the US.
Noted
I think I conclude your view is that only the UK government could deliver this but you do not see the value.
We will have to disagree on that, but I would agree Labour will not do this. It would undermine the BoE, and that would never do.
According to a US Department of Housing and Urban Development Policy Brief, Fannie Mac; “Congress established Freddie Mac in 1970 to develop a secondary market for conventional mortgage loans under the Federal Home Loan Bank Board. Freddie Mac introduced its first conventional mortgage security in 1971, the Mortgage Participation Certificate”. Its purpose, as I understand it, was developed to produce a significant secondary mortgage market, and to bring down the interest rate risk for banks. Fannie Mae was privatised in 1968. That seems to be the issue at stake here. There were a lot of radical structural changes introduced to Fannie Mae and Fannie Mac by the 1980s, which in so many ways in the financial sector generally led us eventually to disaster, as Minsky warned in the early 1990s; although I acknowledge I have not researched the specific Fannie Mac reforms and their consequences; but we do know by 2008 it all ended very badly. It seems to me at least ‘prima facie’ accepting that the principle is worth examining; not the way neoliberal irresponsibility perverted its original purposes. We could also follow the German experience, and our own mutual fund tradition. My point, to keep this short, is that it needn’t turn out badly. Indeed it is ironic how easily commercial banks worm out of responsibility for disastrous judgement, but not the Fannie Macs of the world
We are discussing mortgages for land and scarce housing; that in Britain cannot plausibly be argued will be over-produced, provided there is careful, professional regulation, and responsible management (which it seems is beyond commercial banks), or a private sector provision of loans accessible to all the responsible borrowers who are looking for a home to live in. That is not a high risk, innovation business. It is as basic and safe an investment as can be found, outside a Government bond or guarantee. This is quite obviously a basic failure of provision by a society that insists it wants a property owning democracy open to all. What you are saying Clive is not that nothing can be done here; but rather that it is beyond the private sector commercial banks to do it, or provide the innovation required. If the private sector banks simply can’t do the job, they need to be removed, for an alternative; whether a model based on Germany, or Fannie Mac, or Mutual Funded institutions, perhaps in partnership with Government; or through tax reliefs and subsidies, or other solution, whether innovation or established outside Britain. All the commercial lenders are doing is failing spectacularly; but I am sure they really like what they have; a lot better than actually having to take on real commercial risks outside of securitised lending on property and land to a captive market. You are also reminding us that this is not even a free market, since the rate is effectively predetermined and competition provides no solution. I do not see the upside of your case, for anyone except the lenders; who are obviously content with an effective rate cartel.
“The short answer is that the US capital markets are far deeper and US banks far more innovative. Reproducing that in the UK is, of course, possible… but is it worth it?”.
Worth it …. for whom? Not the UK commercial banks, clearly; but who – and what – are we doing this, to serve?
Reduced mobility, incidentally carries with it a degree of irony. In the UK mobility has largely been one way; to London. The answer to that has been mere puff, and risible in concrete outcomes. The Conservative answer to the awkward consequence of British one-way mobility was “Levelling Up”; that was trivial in its substantive effects and intent, except as political spin to defeat Labour in the North, and demolish the Red Wall. How much has Levelling Up changed the underlying demographic movements, or the quite insane and endemic distortion of economic activity towards London? Very little, I submit. Both Labour and Conservative will struggle to change the reality, even if they are sincere; and I doubt their sincerity. It is just too difficult for politicians to attempt; for they are the prisoners of conventional wisdom and long established vested interests that refuse to change; however ill judged the consequences.
Here’s Scammer on home mortgages. Will get mortgage interest rates down through economic growth and a stable economy!
https://www.independent.co.uk/news/uk/politics/starmer-prime-minister-unions-public-sector-b2578295.html
I used to find this a bit puzzling when I used to visit the US regularly on business in the seventies. All the people I met had fixed rate mortgages for the life of it, and if the rate fell they’d just remortgage at the new lower rate. One CEO I was speaking to when rates were being hiked complained at how much it would cost to get a mortgage for a holiday home he was buying near the Great Lakes, so he said “Hell, I jest had to pay cash!”
“Hell, I jest had to pay cash!”
He probably converted to a fix rate mortgage when rates down. Happens all the time in Florida.
After years of delivering yachts offshore and maintaining a rented apartment as a base ashore in Florida, I had never considered home ownership. However, when I started working in the OR at Johns Hopkins, I discovered that it would cost less to have a morgiuage than continue paying rent. I was able to get a Harp loan to buy a unique, historic double row home on Stirling Street in Baltimore from one of the Nurses I worked with in the OR at Hopkins.
I did not have to raise a deposit and my fixed rate Mortgage included substantial funds to complete further work on the house. This all came at a 7.5% interest rate, but my payments were less than I would have paid in rental accommodation. At some point into the loan, interest rates in general dropped in the US, and I was able to remortgage at 6.25% plus obtain additional funds to work on my home.
Stirling Street was the first ‘Dollar House’ project in America. Although structurally sound the entire street of modest row homes, dating back to 1833, were under serious threat of demolition when the Mayor of Baltimore decided to sell them off for $1 each. There was a requirement to spend a further £30,000 on each house for renovations. The original buyers were referred to as ‘Urban Homesteaders’, and several of them bought two houses to turn into a single larger home. Mine was one such double row home, it was truly unique like a giant dolls house with two front doors, two back doors and six bedrooms including two in the attic where I slept.
There was an amazing unity among the homeowners on our street, whether they were original homesteaders or newer owners who took over the homes. THe neighbors were welcoming to newcomers, offering advice, loaning tools and ‘mother of the street’ Ruby Glover even managed to finagle free Opera tickets. I remember thinking that the 9/11 bombers could never have plotted their heinous crime on Stirling Street, with Ruby visiting them to offer cookies, if she thought they looked ‘a bit peaky’. For me the collaborative spirit of our amazing multi-ethnic street offers a valid answer to security and lower crime: we all looked out for one another.
The visionary ‘dollar house’ initiative could rescue blighted areas of our cities here in the UK, where old properties sit abandoned and neglected. This could provide affordable home ownership with the real team spirit that our Urban Homesteaders had in the US. Sadly, I lost my home on Stirling Street after a three year battle for reinstatement at Hopkins following being ousted as a whistleblower. Unions are weak and employees have very few rights in America; plus there is always the spectre of future healthcare costs if you become seriously sick or disabled.
Those drawn to the US by the prospect of higher wages in professional occupations are no more secure. Even with the health benefits of working in a hospital there is always the reality that you are just one crisis away from destitution and it happens fast. My ex-husband helped me pack a few belongings into his car and a small trailer after my home was repossessed; I forgot to turn out the light as I closed the door for the last time. Forced to abandon my historic row home, I sobbed all the way to Massechesettes; I returned to the UK destitute a week later.
I am 100% in agreement with you , this would be one of the best move any uk government could propose for the UK citizen , now that labour in power i would delighted if they could help the british people by enforcing this proposal forword and another thing would be helpful is if they abandoned the interest only mortagage please let’s come together and support Richard Murphy
Why should Labour choose to abandon interest only mortgages, given the flexibility and value they provide for some people?
Maybe because of the nightmare they create for people as the mortgage progresses?
Interest only mortgages are rental agreements
One of the few people who posts on this blog who actually knows what they are talking about (Clive Parry) has pointed out why it won’t work.
Banks won’t do it as the risk is difficult to hedge.
And your idea of a ‘reasonable interest rate’ is one that would cause banks to lose money.
So they’d need to be subsidised by the government and hence by taxpayers.
And it’s not clear why taxpayers should subsidise other people to buy houses?
I disagree with Clive
The US can do this. Of course we could.
And, you do know we already heavily subsidise housing, don’t you? What else do you think making them CGT free does?
You trolls really do talk utter nonsense.
As an English once rally said to me: Anything the Yanks can do a Brit can do better as they already have the blueprints and map showing all the previous mistakes.
“English” should me “Englishman” who was actually a “Yorkshireman” who was very proud, outspoken and boastful about being Yorkshire born and breed.
One great dude!
But it is reasonable to ask current home owners who are savers to help people become buyers, oh, I’ve just reinvented Building Societies. Government programme to help with the creation of lots of local, independent new building societies?
Presumably if the banks could not make it work there is no reason why we cant gave a National Mortgage Bank (Savings Bank ditto) which either has its own outlets or whose products are sold via existing banks?
And bond issues to back the mortgages to remove risk
The collective knowledge and business acumen of tens of thousands of expert bankers had ruled out lifetime fixed rate mortgages as a good idea, but a retired accountant thinks otherwise…
And apparently there would be ‘no cost’.
😀
The US can do it
Now, tell me what all their economists have got wrong?
“The collective knowledge and business acumen of tens of thousands of expert bankers……”
Most of whom apparently don’t understand either the banking system nor how a fiat currency operates.
Give us a break.
It’s funny how you claim that bankers don’t understand banking or Fiat currency, but you provide no evidence of this claim.
And I’m sure that us bankers know far more about these things than you and Richard – unfortunately that doesn’t give you the answers you want, hence you need to pretend money works in an entirely different way.
Try the Bank of England’s condemnation of the understanding bankers have of banking and fiat currency in the Bank of England’s Quarterly Report, first edition, 2014.
The problem is all yours.
We know. You troll.
I assume you mean the “expert bankers” who created the Great Financial Crash of 2007/8, and who advised on the huge “rip-off” privatisations so beloved of our succession of neoliberal governments, and who have created many other examples of financial mayhem over time.
How naive. The “expert bankers” who crash the system and need bailed out by Government, just because they are too big to fail; at ruinous cost to everybody else over fifteen years; and then somebody tells us they have (presumably authoritative) “business acumen”; but can’t see a monumental bust coming, or avoid making terrible investment decisions. They are still to big to fail. And please note, if you have a bank account, your deposit is protected by a guarantee from the Government up to £85,000; unlike all the real private sector businesses in this country, because they actually have to live and die by their decisions without being quite so gratuitously feather-bedded by the State. And that is a huge contingent liability for the Treasury, and the commercial banks receive it for the princely sum of – zero. If that liability is ever called on, you and I will pay through the nose for it; one way or another.
Or, at least as a minimum, like the German banks do – fixed for 20, 15 or 10 years with no penalty (provided the rate hasn’t risen). They also offer variable capital repayment rates from 1 to 7%.
The other idea I had many years ago was for banks to keep the repayments the same but to vary the life of the mortgage. Just another ‘product’ I know but same result – nearly!
Re: Interest only mortgages. I agree that in essence, they are rental agreements. However, I would argue that they are more secure and, provided they are fixed, more affordable in both the short, medium and long term than current rental agreements. I think the problem in the past was that they were mis-sold and a lot of people just didn’t understand what they had bought. Perhaps the term ‘mortgage’ itself is misleading as I think it implies that one day one will own the property and this is clearly was never the case. Personally I think, but I’m not clear of all the ramifications, that a lifetime interest only facility (as opposed to mortgage) provided by the state at a fixed rate for life would be preferable to either local council housing, housing association or private sector renting. Obviously the state retains title and remains on the Government’s books as an asset.
Thank you, everyone, especially John S Warren.
I agree with John, especially having worked on the regulatory reaction to 2008, but observed / worked on what led to 2008 from the late 1990s onwards.
I think breaking up the too big too fail banks, separating securities business from commercial banking, toughening capital, liquidity and leverage rules, simplifying rules and banning some products are needed.
Surely the main problem householders are now facing is the disparity between inflation, earnings growth and mortgage interest rates?
The gap between inflation and mortgage interest rates driven by the perverse behavior of the BoEs Monetary Policy Committee.
Fixing one element, the mortgage interest rates, when the other two fluctuate can also lead to problems for the borrowers, particularly now that real mortgage interest rates are so much higher than increases in inflation and earnings. Of course if you can cancel after some minimum period this is less the case, but I’m unclear how you can then finance such loans unless you are offering matching lending terms.