The UK’s ‘mortgage bomb’

This is an audio transcript of the FT News Briefing podcast episode: ‘The UK’s “‘mortgage bomb”’

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Sonja Hutson
Good morning from the Financial Times. Today is Friday, June 23rd, and this is your FT News Briefing.

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People are getting worried about high mortgage rates in the UK, and Germany is hitting up the US for natural gas. Plus, Sierra Leone is holding a presidential election this weekend. We’ll talk about how the country’s incredibly high inflation might sway voters. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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The Bank of England raised interest rates by half a percentage point yesterday. They’re now at the highest level since 2008. Homeowners are worried they won’t be able to afford higher mortgages when their fixed rate contracts run out. James Pickford writes about property and mortgages for the FT, and he’s been looking into this issue. Hi, James.

James Pickford
Hi.

Sonja Hutson
So, James, before we get into the rates themselves, can you talk a little bit about how UK mortgages typically work?

James Pickford
Well, the UK, unlike many other countries, it’s kind of dominated by fixed- rate mortgages where a borrower will take a mortgage over 25 years, but the rate will be fixed for two or three or five or seven or 10 years. And that makes it slightly cheaper than fixing over a longer period as it happens in other countries. And people have got very used to a particularly ultra-low-interest-rate environment, to having very cheap mortgages. But of course, that’s coming under a huge amount of pressure now because of these rate rises.

Sonja Hutson
From what I understand, experts expect repossessions to go up as a result of this, but not to the same levels that we saw during the 2008-2009 financial crisis. Why is that?

James Pickford
Firstly, it’s the fact that in those periods most people want a variable rate, and a variable rate means you feel the pain much more rapidly of interest rate rises coming straight through into your monthly payments. Whereas with fixed rates, it gives you a certain amount of protection until the end of your fix. What that does is give you time to plan. The other thing is that we’ve seen, obviously, a huge growth in the value of property, and that means that people have built up quite a lot of housing equity and that gives you a cushion.

Sonja Hutson
So UK chancellor Jeremy Hunt is speaking with banks today to address what one Conservative MP called, “a mortgage bomb” that is about to go off. What can banks do to help ease this pain for borrowers?

James Pickford
Well, there are several things they can do with their customers. They can offer to switch out of what’s called an interest-and-capital-repayment loan, which is the standard for a residential mortgage holder.

Sonja Hutson
That’s a super wonky term. Break down for us what that means.

James Pickford
Yes. So that means you’re paying back both the capital sum that you’ve taken out and the interest on it at the same time. And what you can do if you switch out into an interest-only loan, you’re essentially leaving the capital loan to one side and just paying the interest on the mortgage. And that reduces your monthly costs quite significantly. The other thing that’s been happening a lot is that people used to have 25-year term lengths. And if you extend that term length to 30 or 35 years, that reduces your monthly payments. But obviously it actually raises the amount of interest you pay over the course of the loan. So people have to realise that. You know, they might get this short-term help, but it will cost them over the course of the loan.

Sonja Hutson
James Pickford is deputy editor of FT Money. Thanks, James.

James Pickford
Thank you.

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Sonja Hutson
Germany yesterday took another step away from Russian energy. The company Securing Energy for Europe announced that it’s locked in to buy more than 2mn tonnes of liquefied natural gas from the US, specifically from the American developer Venture Global LNG. The companies did not disclose the gas’s selling price. This is a big deal for a few reasons. First, Germany only started importing liquefied natural gas late last year. And secondly, this deal will meet about 5 per cent of the country’s demand. This is part of a bigger plan for Berlin to be less reliant on Russian energy imports. Germany’s been hit with supply losses since Russia’s full-scale invasion of Ukraine began last year and mysterious explosions demolished parts of the Nord Stream pipeline.

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Voters in Sierra Leone are heading to the polls this weekend to elect a new president. The incumbent president, Julius Maada Bio, is facing off against Samura Kamara, who’s a former governor of the country’s central bank. The high cost of living there has become a focal point of the election. Inflation in Sierra Leone hit 43 per cent in April. Here to talk more about this is the is west Africa correspondent Aanu Adeoye. Hi, Aanu.

Aanu Adeoye
Hello.

Sonja Hutson
Aanu, you recently interviewed both of the candidates. Can you tell us a little bit about the incumbent Julius Maada Bio and what stuck out to you from the interview?

Aanu Adeoye
Yeah. So Julius Maada Bio is running for his second and final term. An interesting thing about President Bio is that in the nineties, he was a military ruler for a very short time before he gave up power and moved to America for quite some time. One of the things he told me was that he’s very keen on having, you know, this massive investment in agriculture to help Sierra Leone reduce their reliance on importing food.

Julius Maada Bio
One of the reasons why we are suffering from what is happening around the world is the fact that we are a net importer of virtually everything. So with that, when prices go up, I cannot reduce it for people here.

Aanu Adeoye
And this is in fact, most of the inflation in Sierra Leone is imported. And what that means is that when Sierra Leone and business people import stuff, for example, rice from Asian countries, the prices in those countries are already elevated. And so by the time they bring it into Sierra Leone, there’s very little that the government can do. And what they want to do is, is (inaudible) massive investment in agriculture because Sierra Leone is blessed with fertile land, and they think they should be able to grow a lot of staple food that they have in the country instead of being overly reliant on imports from elsewhere.

Sonja Hutson
So you also interviewed Bio’s challenger, Samura Kamara. He actually also ran against Bio back in 2018. Why is Kamara running again?

Aanu Adeoye
You know, that’s an interesting question. I asked him, and he said, you know, he was confident in 2018, but things didn’t work out, he thinks, because of the many concerns that people have about inflation, about the cost of living. And this is where, you know, his biography, right, he is someone who has been the central bank governor; he’s worked for the IMF; he’s been the finance minister; he’s been the foreign affairs minister. So what stuck out to me was how, I think, the coherence of how he had a lot of plans for the economy, right?

Sonja Hutson
Like what?

Aanu Adeoye
So, yeah, I mean, he thinks that the country should have better relations with the international mining companies. He thinks that Sierra Leone needs a lot of financial investment in the mining sector. And he says he has the right connections to be able to attract massive investment into Sierra Leone.

Sonja Hutson
So we should mention Sierra Leone has been on this 20-year run of democracy after a pretty long civil war. Is that going to continue? Are the elections expected to be peaceful and fair?

Aanu Adeoye
That’s the big question, right? From speaking to people, everyone seems to be concerned, and I think it’s up to the political parties to ensure that this goes smoothly and show that this is a free and violence-free election. So I think we have to keep our fingers crossed and hope for the best.

Sonja Hutson
Aanu Adeoye is the FT’s west Africa correspondent. Thanks, Aanu.

Aanu Adeoye
Thank you.

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Sonja Hutson
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Marc Filippino, Fiona Symon and me, Sonja Hutson. We had help this week from Breen Turner, Josh Gabert-Doyon, Manuela Saragosa, Jess Smith, Simon Pinney, Katie McMurran, David da Silva, Michael Lello and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

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