Don’t blame two-year fixes for mortgage mayhem, blame failing to raise rates sooner

This collapse is unique and totally unprepared, says Martin Stewart, director of brokerage firm London Money, sharing his view from the sharp end of the mortgage chaos.

I have heard that many different culprits are being blamed for Britain’s current financial crisis.

Another new suspect arrived recently and that was a modest and once-popular two-year fixed rate mortgage.

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

I will personally have taken out over 5,000 mortgages covering hundreds of millions of pounds and all through a wide variety of economic cycles. In addition, my company recently passed £1 billion in mortgages.

I don’t say this to gain credit, I’m just 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 will be more than able to to stand man.

So if someone like me says that the current mortgage meltdown is something unique, unannounced and totally unprepared, people should sit up and pay attention.

For starters, this is very different from the financial crash of 2008, a liquidity crisis that hit banks that quickly ran out of money.

This time it is the consumer with the liquidity crisis.

I fear that in hindsight it will prove easier to resolve a systemic risk that will cost the finances of millions of individuals.

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

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

The bulk of that money was pumped into a housing market that we were told was only going up.

We have commercialized our lodgings in the quest for profit, either as homeowners or as landlords. Now the money gods are dissatisfied with us – and everything is about to change.

In addition to consumerism being a cultural problem for us, we have also created a generation of short-termism where we throw everything away with the flick of a finger, the press of a button or the click of a mouse.

Today, we throw things away too easily — cars, phones, technology, spouses — and that attitude has seeped into our mortgages.

For over 20 years, many of us have traded off our mortgage debt every two years, but instead of trying to cancel it, we’ve often instead used some of the capital appreciation to filter back into consumerism.

So that the whole thing became a virtuous or vicious circle, depending on your point of view.

It was certainly hard to argue against as interest rates continued to fall and fall, lenders battled for market share (trigger warning: just like leading up to 2008), and we were all packed like we were Augustus Gloop at the Chocolate Factory, on what felt like as free money.

While we as consumers are complicit in this mess, the overall blame for where we are rests firmly at the feet of the usual suspects – those who create, implement and manage our economic policies.

We’ve had a 15-year economic cycle that ends in 15 months, when we should have had a 10-year economic cycle that ends in five years.

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

It was clear to many that when we came out of that first lockdown in the halcyon summer of 2020, feasting on initiatives for free stamp duty and two burgers for the price of one, that we had to be much further along in increasing costs of borrowing than we were.

Hindsight is often a great thing, but a terrible way to run your economy.

Our data shows that customers are now seeing their mortgage payments increase by an average of £400 to £500 a month – a number that is only rising.

During the same period, our landlord customers see payments increase by 101 percent.

These are huge numbers to the imagination and a £500 a month increase for a higher rate taxpayer will feel like a £10,000 a year pay cut.

That is a hefty price to pay for reducing the cost of that half liter of milk by 10 percent.

Of course I’m exaggerating the point to make a point.

But if the Bank of England is now more concerned about a wage spiral, it might do well to keep an eye on the economic death spiral that is 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 that’s how recessions start.

If we avoid one it will be by the narrowest margin as we transfer billions of pounds from the discretionary spending economy and park it on the banks’ balance sheets.

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

Personally I don’t think so. Despite all this, we have seen so far that 65 percent of our customers still prefer mortgage products with a term of two or three years.

Speaking to others in 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 may be hard to break.

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

Until then, we create competitive products to satisfy both desires – flexibility and security – consumers will forever be polarized with that simple but stark choice.

No one buys a house on a whim and no one takes out a mortgage just like that. There are often many discussions, anecdotes and devil’s advocate games played out between a mortgage broker and their client.

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

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

Sometimes those shorter rates allow you to keep your powder dry something you might be happy about when it comes time to make a material change in your life and your mortgage because these days those two are inseparable for many with connected.