Mortgages

Back in the early part of the 20th century, the US mortgage market looked very similar to the UK market.  2-year and 3-year fixed term mortgages were very normal on both sides of the pond.

However, along came the Great Depression and hundreds of thousands of people in the US lost their homes. Millions more found themselves in what came to be known as ‘negative equity’. At this point, the look of both markets changed significantly as the US government stepped in.

In order to make sure such an occurrence would be avoided in the future, the US government said, “mortgages should be fixed for as long as possible” and the 30-year mortgage was born. Today, more than 70% of American homeowners have 30-year fixed mortgages.

In the UK that did not happen. The choice for UK mortgage payers is between a variable rate, or a short-term fix. Anything more than five years is very rare. Have a look at the chart below:

Source: Bank of England/Mortgage Bankers Association

In the short-term, this means changes in interest rates hit mortgage-owning households far more quickly in the UK than in the US. Whereas in America, if rates go up, you do not have to do anything – you have capped your costs for 30 years. If they go down, you re-mortgage and lock in a lower rate (for thirty years!) It really is win-win.

 And, having had nearly 100 years of these type of mortgages, consumer behaviour has changed between the two countries. Imagine knowing your mortgage costs were capped for three decades – if you had established your budget and knew what you were paying, wouldn’t you feel more relaxed?!

If you need any help with your mortgage situation, please do not hesitate to speak to your Prosperis adviser.