Don’t Blame Two-Year Fixes for Mortgage Chaos, Blame Not Raising Rates Sooner

This collapse is unique and one that I was not prepared for, says Martin Stewart, brokerage director at London Money, as he shares his view from the end of the mortgage chaos.

I have heard that much of the blame for Britain’s current financial crisis is placed on many different culprits.

Another new suspect came along recently and it was a humble and once popular two-year fixed-rate mortgage.

I’ll get back to that in a bit, but for context, there’s not much you can’t tell me about the real estate or mortgage market.

I will have personally arranged over 5,000 mortgages covering hundreds of millions of pounds and all through a myriad of different business cycles. Also, my business recently surpassed £1bn in mortgage originations.

I’m not saying this out of recognition, I’m simply pointing out that in the unlikely event that I find myself on a fishing boat with Brody, Hooper and Quint comparing scars and war stories, I’ll be more than capable of holding my own.

So when someone like me says that the current mortgage meltdown is a one-off, unannounced, and unprepared thing, then people should sit up and take notice.

For starters, this is very different from the financial crisis of 2008, which was a liquidity crisis that hit banks that were quickly running out of money.

This time, it is the consumer with the liquidity crisis.

I fear that in hindsight it will be easier to fix a systemic risk than the finances of millions of people.

Once you know what the problem is, it becomes easier to identify its cause, and in my opinion, the cause is quite simple: it’s the culture.

We have had too easy access to too cheap money for too long.

The vast majority of that money was pumped into a housing market that we were told only went up.

We commodify our shelter in the pursuit of profit, either as homeowners or renters. Now the money gods are displeased with us and everything is about to change.

In addition to consumerism being a cultural issue for us, we have also created a generation of short-termism, dismissing anything with a flick of the finger, button press, or mouse click.

We part with things too easily these days: cars, phones, technology, spouses, and that attitude has seeped into our mortgages.

For more than 20 years, many of us have traded our mortgage debt every two years, but instead of working to pay it off, we have often agreed to part of the capital increase to return to consumerism.

So it all became a virtuous or vicious circle, depending on your point of view.

Mortgage rates have soared well beyond the point most thought they would reach, as the Bank of England belatedly raised the base rate to cope with stubbornly high inflation.

It was certainly hard to argue against, as rates kept falling and falling, lenders fighting for market share (trigger warning: just as they did in the run-up to 2008), and we all gorged ourselves like we were Augustus Gloop at the chocolate factory. in what seemed like free money.

While as consumers we are complicit in this mess, the overall blame for where we are falls squarely on the usual suspects: those who create, implement, and manage our economic policies.

We’ve had a 15-year business cycle that comes off in 15 months when we should have had a 10-year business cycle that comes off in five years.

A firm, calm and pragmatic approach from 2017 would have put us in a much better position today.

It was clear to many that when we emerged from that first lockdown in the blistering summer of 2020, gorged as we were with free stamp and two-for-one burger tax initiatives, we needed to go much further with the rising cost of the loans of what we were.

Hindsight is often a wonderful thing, but a terrible way to manage your finances.

Our data shows that clients now see their mortgage payments increase by an average of £400 to £500 per month, a figure that continues to rise.

In the same period, our homeowner clients are seeing a 101 percent increase in payments.

These are huge numbers by any stretch of the imagination and a £500 per month raise for a higher rate taxpayer will feel like a £10,000 per year pay cut.

That’s a high price to pay to cut the cost of that pint of milk by 10 percent.

Of course, I am exaggerating the point to make a point.

But if the Bank of England is now more concerned about a wage spiral, it would do well to keep an eye on the economic death spiral building in the background.

Everyone we talk to talks about cutting back and making sacrifices. I’m not an economist, but I’m pretty sure this is how recessions start.

If we avoid one, it will be by a very small margin, as we transfer billions of pounds from the discretionary spending economy and keep it on the banks’ balance sheets.

So, going back to those two-year flat rates, was it really your fault?

Personally, I don’t think it is. Despite all this, so far this year we have seen that 65 percent of our clients continue to prefer two- or three-year mortgage products.

Speaking to others within the industry, we are not an outlier and other brokers are reporting a similar trend.

Again, it goes back to a long-standing culture that can be hard to break.

Personally, I think it comes down to a simple choice, flexibility (two years) versus certainty (five more years).

Until the time comes to create competitive products to fill these two desires, flexibility and certainty, consumers will always be polarized with that simple but stark choice.

No one buys a house on impulse and no one takes out a mortgage on a whim. There are often many debates, anecdotes, and devil’s advocate games between a mortgage broker and his client.

This can go on for weeks or even months, so trust me when I say short-term products aren’t necessarily the bad guys here.

Many prefer the flexibility because while their rate may be transferable, they, as the borrower, may not be.

Sometimes those lower rates allow you to keep your gunpowder dry, something you might be happy about when it comes time to make a material change to your life and your mortgage, because these days, for many, the two are inextricably linked. .