Longer-term fixes in the US are possible through a different mortgage funding model to the UK, where home loans are propped up by current accounts and short-term fixed rate deposits.
Christian Hilber, a university professor at the London School of Economics, said: “In the US, they sell their mortgages to Fannie Mae and Freddie Mac [firms which guarantee most of America’s mortgages]. They then bundle these mortgages and sell the risk to investors. This allows them to spread the risk.”
The system has its flaws, of course. During the 2007 financial crisis, the subprime market collapsed and lending froze. This was exacerbated by lax regulation, much like in the UK, which had allowed lenders to issue mortgages based on shaky affordability.
But Professor Hilber said it does enable US borrowers to lock in fixed interest rates for a very long time. The professor added: “The UK market is diametrically different, with the typical mortgage being a two-year fixed – a teaser rate – before you roll on to a variable one.
“This means that in the UK, many more borrowers are exposed much more to interest rate risks. So, many more lower and middle income households will face difficulties paying their mortgages, and will experience hardship as a consequence.
“It is an additional consideration the Bank of England needs to take into account, making combating inflation even harder.”
America spreads the pain, the UK doesn’t
Arjan Verbeek, of long-term mortgage firm Perenna, said this system allows America to spread the pain of financial hardship across its population more evenly than the UK – which simply cannot.
He said: “The US is a more energy-independent and diversified economy. It also has a predominantly long-term fixed rate mortgage market which allows the Federal Reserve to raise rates and the pain is spread relatively equally over the economy.
“When the Bank of England increases interest rates, the pain is mainly felt by mortgage borrowers.”
The Bank of England has said four million borrowers are still yet to feel the pain of higher mortgage repayments, with some four million affected so far.
