London bankers with giant mortgages consider renting rooms
As British interest rates rise, British mortgage payers are hurting. The Bank of England's July financial stability report says that over a million households in the UK are faced with the prospect of their mortgages increasing by £500 a month. However, around 400,000 UK households are on track for an increase of over £1k a month in their mortgage repayments. And plenty of people in that category work in finance.
"Lots of senior bankers live beyond their means," says one former director at Credit Suisse. "A managing director who just got fired and has a £5m-£10m house could be facing mortgage costs going from £5k to £25k a month. I know plenty of MDs who have £3k mortgages, and that's at 1.5%."
Mortgage brokers confirm the pain. Aaron Strutt at Trinity Financial, a mortgage broker with offices in London's Mayfair and Islington, says that until a few years ago banks were offering the most alluring rates to people taking out mortgages of between £2m and £10m. "They were 1.5% or so, and now they're going up to 6% on two year deals," he says.
It doesn't help that mortgage lenders that specialize in working with London bankers, often offered "bullet repayment" arrangements, allowing borrowers to take out higher loan to value mortgages on the understanding that they'd pay down the amounts with future bonuses. Unfortunately, bonuses weren't great last year. And they will probably be bad this year too.
Even when bankers aren't making official "bullet repayments," it's common for people in banking to take out interest rate only mortgages with a view to paying down the capital sum with bonuses. "A lot of people in banking are on interest rate only mortgages and don't often pay mortgages down," says one MD who recently left a US bank. "People are really getting whacked – there’s no nice way of saying it," says Strutt.
Unsurprisingly, therefore, brokers say they're getting calls from bankers with big mortgages along with everyone else. "High earners with big mortgages are saying exactly the same things as normal people," says Andrew Montlake at Coreco. "- 'My mortgage has gone up dramatically, and how can I work with you to mitigate the pain?'"
Montlake says a lot of people are paying off lump sums, shifting to part repayment part interest only mortgages, or using offsets. "My message is to speak to a mortgage broker early," he says. "Work to get a plan in place, so you know what the options are, and we can reserve a rate six months in advance to make sure you're not exposed further."
Others are contemplating more radical solutions. One VP at a US bank in London says he has a colleague who's thinking of renting out a room: "He's had to refinance his property, and it's been a big cut to his standard of living."
While senior bankers with the biggest mortgages face the biggest increases in their repayments, Strutt says many are shielded by the large amount of equity they've amassed in their homes. Hypothetically, they could sell if necessary. This isn't the case for more junior people in their late 20s and early 30s who leveraged up when bonuses were big and rates were low and are now in a difficult spot as house prices fall. "There are people in their mid-20s with mortgages of £400k to £500k," says Montlake. "Their mortgages are rising by £1,000 a month."
Junior bankers being let go by Credit Suisse are in a particularly challenging situation. "People were over-confident and levered themselves up," says one Credit Suisse VP. "They are in a bad spot if they don't have a stable job."
With all the discussion going on in the UK about helping mortgage borrowers because of higher rates, I think it's worth reposting Bank of England data on household debt.
— JohannesBorgen (@jeuasommenulle) June 26, 2023
Are we sure we want to "help" people on the right of the chart ? pic.twitter.com/p0ozjaeP7J
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