- The Mortgage Crisis: Personal Experiences of Financial Strain
- “Extend and Pretend”: Extending Mortgage Terms as a Solution
- Inflation Blame Game: Government, Bank, and Businesses Point Fingers
There is an abundance of volunteers willing to share their experiences.
“My monthly mortgage repayments have increased by £270 per month.”
“It’s terrifying. Petrifying.”
“Several hundreds of pounds.”
“I don’t slumber well at night. Distraught. I am powerless.”
This was the week that inflation stalled, the Bank attempted to regain control, Number 11 advisers warned of the need to “create a recession,” and a blame game for inflation erupted, all against the backdrop of a mortgage crisis.
On a visit to a Brighton mortgage broker, I was therefore initially struck by the response that these increases were indeed possible and anticipated in the “Key Facts Illustration” required for mortgage applications.
This form depicted the necessary repayments should interest rates reach a 20-year high. They are at their highest level in 15 years. And secondly, Iain Carter, the broker, informed me of the almost automatic practice of extending mortgage terms for clients.
He informed me that it is now possible to extend loan terms for some customers until they reach the age of 80. Thus, mortgages have a duration of four decades. Since 2007, the concept of a mortgage term of over 30 years, which was once a rarity affecting fewer than one-fifth of first-time purchasers, has become the norm for more than half of buyers.
Extending the tenure of a £200,000 mortgage from 25 to 33 years could reduce monthly payments by approximately £150. However, the loan’s total interest expense over its tenure would increase by £50,000.
Extend and imagine
This is known as “extend and pretend” in commercial markets. As a solution to the present mortgage quagmire, both the government and the opposition are encouraging banks to offer this.
This may dilute or delay the impact of recent big rate rises. It helps explain why more people have fixed rates than in the 1990s. For this reason, the Monetary Policy Committee of the Bank of England repeatedly stated that the “full impact” of the rate increase would not be felt “for some time.”
A crucial concern is not only why British inflation is higher than elsewhere. But also whether British interest rates are rising faster than those of comparable nations. After a week of stagnant inflation and aggressive rate hikes by the Bank of England and in the mortgage markets, a blame game for inflation is emerging amid a monetary conundrum.
Markets expect UK interest rates will start 2024 at 6-6.25% and stay there for much of the year, levels not seen since 1998. The Bank did not discourage market expectations like it did in September. Its decisions are “data dependent”, it asserts.
The Bank of England has had independence and the power to regulate interest rates to control inflation for 25 years. To support the economy following the 2008 financial crisis, when bank lending nearly came to a standstill, interest rates were kept at near-zero levels for a decade and a half.
It was always going to be difficult to restore normal rates. The Bank of England can afford to make contentious but necessary decisions due to its independence.
Indeed, in the United States, the head of the central bank, Jerome Powell, has repeatedly stated that a “correction” in the housing market is one of the main reasons for raising interest rates and the best example of how it is working to help reduce inflation. This has helped convey his determination to the financial markets.
Andrew Bailey, governor of the Bank of England, is unlikely to be perturbed by his zen-like approach to criticism, particularly from Truss-supporting newspapers that felt the Bank could have acted more swiftly to calm markets after the mini-budget.
This week, however, some members of the cabinet publicly criticized the Bank. Some former Bank officials remarked that the government’s own policy decisions, particularly regarding post-Brexit trade and labor, had contributed to inflationary pressures.
However, in public, the Bank and government were united in their anti-inflation mission and strategy. More interestingly, the chancellor, the prime minister, and the governor all referred to the re-establishment of companies’ profit margins through the maintenance of high prices. There is some ambiguity and cause for concern regarding why wholesale price reductions are not being passed on to consumers. The supermarkets were mentioned, but there may be a larger issue further upstream in the supply chain.
This strategy encourages supermarkets and others to be less circumspect about how government policy affects prices, which is political.
Tesco’s CEO, Ken Murphy, stated on Thursday at The Times CEO summit, “Brexit has had an impact” on the company, which faces higher costs for importing goods, higher administrative costs, and “significantly higher” costs for operating in Northern Ireland. Mr. Murphy said Brexit and the virus had affected labour availability “with several EU citizens leaving the country after Brexit.”
It is telling that government officials must implore businesses to limit price increases. If the economy were competitive and efficient, this would be a natural occurrence.
The blame game has the potential to misfire, and Number 11 is attempting to avoid it. However, it occurs because the political repercussions of the escalating economic suffering and mortgage market time bomb will be severe.
