In a never-ending saga, I’ve spent quite a lot of free time these past few weeks studying the UK mortgage market. In sum: crazy:
- Where I’m coming from: US mortgages. In particular, the fixed-rate 30-year mortgage guaranteed by Fannie Mae or Freddie Mac. When my wife and I bought a house in the US, the choices were pretty much either a 15-year or 30-year fixed rate mortgage. Simples.
- How about a 30-year fix in the UK? Nope, not available. If only Americans fully appreciated how sweet the government support of housing is in the US. No dice in the UK. BTW, for those wondering – mortgage interest is tax-deductible in the US, but not in the UK. But anyway.
- What do Britons do? Fix for 2 years. The standard mortgage here seems to be a 2-year fixed rate, which then reverts to a penal ‘Standard Variable Rate (SVR)’ charged by the bank. Given low rates, there are several offerings for 3-, 5- and 10-year fixes these days. In practice, the assumption is the mortgager refinances by the end of the fixed rate period – spending another £1,000 or so on fees for the privilege of keeping a discounted fixed rate. Or they move, or pay off the debt, or…
- How to take advantage of low rates? Variable/tracker mortgages. If you believe rates will continue to fall, there are mortgages which either reflect changes in that SVR (‘variable’) or changes in the Bank of England base rate (‘tracker’). Those smart cookies who successfully predicted the massive fall in BoE base rates entered a strange world of negative mortgage payments in 2008/9. With the base rate at 50bps, I’m guessing there isn’t much further to go.
- Extension: but what if I wanted to ‘fix’ my own 30-year mortgage? The SVR is completely at the discretion of the mortgagee – they can change at will, so very hard to hedge interest rate risk on a variable, or indeed 2-year fixed, mortgage. The tracker is more interesting – BoE interest rate decisions generally take place at meetings announced well in advance, so could in theory be hedged. I’m looking into solutions involving Short Sterling and/or UK gilt futures to achieve the fix.
- Brilliant UK innovation – offset mortgages. It’s well-known that paying off mortgage principal early is a good thing, to build equity and lower total interest paid. But what if you come across a load of cash (a bonus, perhaps), with a potential need for said cash in the future (early retirement, perhaps)? The offset mortgage allows your cash savings to offset the mortgage principal; you can still access your cash if needed, but otherwise you only pay interest on the net amount of principal outstanding. I like that feature, though it comes at the cost of higher interest expense.
- But wait – don’t you loathe the UK housing market? Hmm… yes, particularly in London area. Upon further research, housing in the Midlands and North of England (+ Scotland and N Ireland) isn’t as overpriced/undersupplied as the dreaded Southeast. This is reflected in gross rental yields: London yields are a joke (3% p.a. before fees/fixes? Happy to rent with that.), while yields elsewhere are much more reasonable. So maybe worth investigating a purchase further afield.
What fun, investigating financial products. Ah, to have a 3.8%, 30-year fixed mortgage with a tax credit to boot instead.