Longer-term solutions in the US are possible through a different mortgage financing model than in the UK, where home loans are backed 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 together 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 mortgage market crashed and lending froze. This situation was exacerbated by lax regulation, much like in the UK, which had allowed lenders to issue mortgages on the basis of an unaffordable price.
But Professor Hilber said it allowed 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 rate – a teaser rate – before moving to a variable rate.
“This means that in the UK many more borrowers are much more exposed to interest rate risk. As a result, many more low- and middle-income households will struggle to pay their mortgages and experience hardship as a result.
“This is an additional consideration for the Bank of England to take into account, which makes the fight against inflation even more difficult. »
America spreads the pain, not the UK
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 United States is a more independent and energy-diverse economy. It also has a long-term fixed rate mortgage market that allows the Federal Reserve to raise rates and the pain is spread relatively evenly across the economy.
“When the Bank of England raises interest rates, the pain is mostly felt by mortgage borrowers. »
The Bank of England said four million borrowers have yet to feel the pain of higher mortgage repayments, with some four million affected so far.