Due to a shared history and a common language, the UK and the US have a lot of cultural similarities.
If something (a film, a book, music, a play, a brand) is popular in the UK, it’s got a good chance of being popular in the US, and vice versa. You give us Friends and Hamilton, we’ll trade you for Downton Abbey and James Corden (he went to school not 800 yards from where I am typing).
But in one important area, the US and the UK parted ways nearly one hundred years ago.
Mortgages
In the Roaring 1920’s, the US mortgage market looked quite like the UK. 2-year and 3-year fixed term mortgages were normal.
Then the Great Depression hit. Hundreds of thousands of people lost their homes. Millions more found themselves underwater.
The US government stepped in. And to avoid repeating history, it basically said “mortgages should be fixed for as long as possible”. The 30-year mortgage was born. Today, more than 70% of American homeowners have 30-year fixed mortgages.
In the UK that didn’t happen.
Your choice here is between a variable rate, or a short-term fix. Anything more than five years is very rare.
Which leads to the huge difference in the chart below:
Source: Bank of England/Mortgage Bankers Association/7IM
In the short-term, this means that 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 don’t have to do anything – you’ve 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 our next import from the US was a range of 30-year mortgage deals (rather than another Marvel superhero film), I wonder how quickly the above chart would change?
The above does beg the question though, why have increased interest rates in the US been so effective in bringing down inflation, if mortgage borrowers are seemingly unaffected, when in the UK higher interest rates seem to be having little effect? Answers on a postcard please!
I hope you have found this interesting but, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
