CITY AND SUBURBAN
If mortgages didn't exist, nobody would be allowed to invent them
CHRISTOPHER FILDES
You signed what? An agreement to borrow money for 20 years? How much money? Dear me, that must be about four times what you earn in a year.... Quite. And at what rate of interest? The man didn't say, except that it can go up and down? Up and down in line with what? In line with whatever the lender likes to make it? And what happens if you don't like it? Can you pay it back? Yes, I heard you using what? I meant, do you have the option? The man said it was subject to Penalty, the lender will demand more money from you if you try to pay him back? What size of penalty? Whatever the lender likes to say it is? You know, speaking as your adviser, I'd say that You're the sort of person who if he hasn't got his adviser with him shouldn't leave the house. By the way, have you given any security for this loan? Your house? Gosh. And what did the man call this? A mort- gage? He says everybody has one? Oh, I see. — The great British mortgage, if it did not exist, would hardly be allowed to be invented. Lawyers would shake expensive heads at such unlimited risks, consumer councils would counsel avoidance, and building society managers would find cam- eramen on their doorsteps and feet in their doors. How have they, and we, been able to stay out of trouble all these years? We have been protected, without thinking about it, by three lines of defence, but one of them has gone, and the other two will now be put to the test. In the dozy old days When the building societies had the mort- gage market to themselves, they set their interest rates, as you might expect, by cartel. Once a month they would all go to lunch at their Association, which would then 'recommend' a rate. Now the cartel has crumbled, and that line of defence has crumbled with it. The next line is the price of houses. So long as prices were rushing on upwards, neither the borrower nor the lender had too much to worry about. The borrower's capital gain more than made up for the cost of his financing. As for the lender, his market was growing prodigious- ly, and his security improving every day. House prices go up in the same way that God pays — that is, not every Tuesday. Over time they have risen as people have become better able to afford their mort- gage payments out of income, but not at the same pace, by any means. Last year the average house price rose to four and a half times the average income — the highest this ratio has ever been. Seven years ago, and seven years before that, the ratio fell back, to three times. If that seven-year cycle comes round again, house prices will fall, as the Bank of England predicts, and the only question will be how far.
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