The UK and US property & finance market has been talked about greatly over the last few month, by myself included. I would like to point out however that there are several major differences between the UK housing and mortgage market and than of the US, suggesting that the UK should not feel the same house price and credit crises currently faced by the US.
Fixed Rate Mortgages & Stepped Rate Mortgages
There is a conservative tendency in the UK for homeowners to prefer fixed rate mortgages, as opposed to variable rate products on the market, historically due to the consequences many homeowners felt in the 1990's with interest rates above 12%. More importantly there are few independent mortgage brokers I know of who recommend mortgage products with stepped rates*. Stepped rate mortgages are rare in UK with little popularity due to several factors;
(i) - Rates tend to be extremely low to begin, usually around 3%.
(ii) - Rates will generally increase once per year of around 1% - 2%
(iii) - Homeowners will be fixed for generally 3 - 5 years at which point the interest rate is well above other competitor rates
(iv) - Stepped rates tend to carry severe redemption penalties**
(v) - The interest rates tend to be variable which means calculating what your payments will be in 3 years time near impossible.
These factors have led me to shy away from recommending such products, the product providers have a good concept, create a mortgage for people who are on low incomes to buy their own home and as household income historically increases over time clients will be able to afford higher monthly payments. On paper it makes sense but in reality, as we are now seeing in the US, homeowners simply don't appreciate or think about how they plan to pay for next year or the year after.
Federal Reserve and FSA
The UK's FSA have far more sweeping powers and controls compared to the US self regulated style system, although the self regulated system can have great benefits to competition, marketing flexible lending criteria this can have devastating effects when things go wrong.
The FSA done great work in ensuring customers are treated fairly along with brokers & lenders being accountable for their advice and services.
The US Sub prime & UK Adverse Credit Market
Going back to the earlier factor on fixed rate mortgages and stepped rate products, due to supply and affordability US mortgage brokers have offered sum prime clients, generally classified as higher risk, a high risk product. In the UK clients with Adverse Credit who are also classified as high risk will be offered several options with the fixed rate being favorable due to the monthly payments remaining the same.
The major problem currently facing the UK mortgage market is money or rather lack of it.
Take northern rock as a prime example, traditionally Northern Rock doesn't lend to clients with adverse credit. On their high LTV products the credit check is of high importance, however they have still found them selves the victim of the current money market.
Although house prices may stay stable in the UK along with few missed mortgage payments, we still have to tackle the issue to bringing new money into the market at a lower cost.
Hopefully the new year will bring a new LIBOR rate***.
Daniel Morgan
Mortgage Broker & Finance Journalist
* A mortgage product which increases interest rates over a specified period
** Penalty fees for redeeming the mortgage before an agreed date.
*** Interest rate at which banks lend to each other
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2 comments:
The US relies on fixed rate mortgages far more than the UK. Indeed, they have had the 25 years fixed rate option as a maintsream product for decades.
The people on teaser rates in the US were indeed largely the subprime BUT the US includes people who self-certilied (getting equivalent to 8* income but making up a salary so it looks like 4* income is as bad as person taking teaser rates, and we have hundreds of thousands like that). The US would include self-certilied and BTL in subprime. We do not. With higher income multiples our payments shock will be from 4.5% fixed to 6%+ or to the higher SVR.
The FSA is principles based and the US is prescription based. That means there is as much scope here for dodgy dealing...witness the self-certilied. And the FSA is incompetent...people warned of self-certilied and similar dodgy practises that have driven the housing market up (well over 10% of new mortgages since 2004). To argue the FSA has been more vigilant seems odd....by ignoring agents who allowed people to take on mortgages so high that any payments shock will drive them under is negligence (a 25%+ payment increase i.e. from 4.5% to 6% when there is no slack left (something we will see during 2008). In fact, the US has a better record of fining the financial industry.
Please feel free to delete this paragragh for legal reasons...if you go to the Foxtons' "independent" broker, Alexander Hall, site and see what income multiple you can get and its fees and teaser rates, I hope you would be shocked that the FSA has done nothing about them. It is a model that relies on the latest commission i.e. to keep these rates requires new fees being added at each remortgaging stage, there is no thought for a cusion against shocks and certainly no room to pay beyond the interest.
Moreover, our "just a shortage of cash" stems from the fact that easy money that should not have been available has disappeared (we have been hit by the same stopping of the same securitisation process that the Fed ignored...so did the FSA). To argue it is just a lack fo money is to say Northern Rock was the cause rather than a symptom (I think the latter).
Hi, thank you for your comment, I have decided to post your comment although I do disagree with some its content its important for readers to see views from other people. Can I ask however that anyone wishing to post a comment of this nature also provide their name as I am been open I hope comment makers will be aswel. Does anyone else have any comment on this topic, it would be interesteing to create a debate.
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