Just Splendid

>> Wednesday, March 03, 2010

Is the UK going to be the next Greece or Iceland? When I moved here in 2003, when times were good economically, I did openly wonder about the sustainability of the British economy. It didn't seem to be based on much more than the City of London, and heaven forbid, should anything happen to the financial services industry . . .

The consequences might be grim. I'm bemused by the stories linking the sudden accelerated decline in the pound to the YouGov poll released Sunday showing only a +2% Tory advantage. Apparently the nebulous markets fear a hung Parliament.

There is a paragraph from the NY Times story that hits wide of the mark, however:

In an echo of the United States’ rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.
This completely and utterly fails to understand the British property market. There was some "sub prime" stuff going on, yes, but that was not tied to "teaser" rates. Rather, banks would lure in lesser qualified applicants through manipulating two variables, the Loan to Value ratio (Northern Rock was offering mortgages worth 125% of the property value in 2006, for example; one wonders how Northern Rock were one of the first casualties of the credit crunch) and personal income ratios.

Most mortgages held in the UK are "tracker" mortgages, which are tied to the Bank of England rate -- in other words, variable rates. When I bought my house in 2004, the longest fixed mortgage on the market was only for 5 years (there are now 10 year fixed mortgages available), so I took out the five year fixed mortgage (and paid over the odds in order to lock in that security). When a fixed term expires, or when the tracker expires, you are placed on a bank's Standard Variable Rate, which has been quite low considering the BoE is at 0.5%. Hence, six months ago or so, my rate went from 6% to 3.5% overnight. The drinks were on me.

Until this month, when my building society unilaterally raised their SVR 1.5%, so now I'm back up to 5%. When the BoE finally gets around to raising their rate, my mortgage goes up. There's not much I can do about it -- existing fixed mortgages are 1.5 to 2 points above what I'm currently paying. Of course, if this NYT story pans out . . .

I was all in favor of a hung Parliament for the sheer lunacy of it and the joy that it would provide me.

I now find that I'm rapidly losing my enthusiasm.


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