Serious Strings & Things

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This is CBS I Am The World. I'm John Batsow with Joseph Sternberg.

Member of the editor board of the Wall Street Journal. He writes political economics column based in London.

He also is helping me to understand the difference between a fixed mortgage and an adjustable mortgage

in the world of mortgages in the United Kingdom. I come to this headline in these last hours to see if I understand.

This is Reuters UK two-year mortgage rates top six percent adding to housing strains.

The explanation is that British lenders of race interest rates sharply in recent weeks

as stubbornly high inflation has pushed up expectations among investors for where the bank of England rates will peak.

All right, that sounds familiar central bank rate guessing ahead.

But I'm unfamiliar with a two-year mortgage. Please explain, Joe, you do this each time to me and I don't take notes carefully enough.

I think the best way for American listeners to understand the UK mortgage crisis really is what we need to call it.

Is to think of British households having variable rate mortgages but with a ratchet effect.

So in the US, you borrow a 30-year mortgage and your interest rate is fixed for the entire length of the loan.

So for as long as you have it, your monthly payment will be the same.

Whereas in the UK, you will spread your principal repayment out over 30 years.

But in terms of the interest rate that you pay, you might only fix that for two or five years at a time.

And then basically it becomes variable at the end of that because you refinance on to another two or five year fixed deal at the prevailing interest rate.

So the reason that there's a crisis in the UK mortgage market right now is that anyone who refinance their mortgage in recent years when the interest rates are historically low.

So ideally if they did serve over the two, three years ago when rates for the two year fixed period, where as low as 1.5%.

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