By John Phillips, national operations director at Just Mortgages.
Those of a certain age will struggle to forget the 16th of September 1992. It was one of the most turbulent days in British peacetime history, and one that offers many parallels in today’s climate.
With sterling devalued and tanking in Europe’s Exchange Rate Mechanism (ERM), plans to raise interest rates further to 15 per cent were still not enough to drive down inflation and stop the rot. As a result, Chancellor Norman Lamont was forced to withdraw the pound out of the ERM after just two years.
It was the culmination of a very challenging period for the country – deep in recession with high unemployment, high interest rates and record levels of repossessions and bankruptcies.
Black Wednesday left the Conservative’s reputation for fiscal competence in tatters, derailing John Major’s premiership and ultimately helping Labour secure their landslide victory in the 1997 general election.
After all, the ERM was meant to be the ‘silver bullet’ that would solve Britain’s inflation woes. The pound was pegged to the Deutschmark and given strict bands to trade within. But those bands soon became a noose as the weak pound struggled to keep up with Europe’s strongest currency.
Mortgage client worry
Like many my age – especially those in the industry, I remember that period vividly. I was just starting out, working for Royal London and looking after the mortgage and investment needs of 1,000 clients in my patch.
Every week, I’d see around 70 customers and the question was always the same – how are we going to afford these mortgage rates and pay our bills? That was especially true on Black Wednesday when the base rate jumped to 12 per cent, with plans for a further rise up to 15 per cent.
In 24 hours, many homeowners faced the prospect of no longer being able to afford the house they owned, let alone to remortgage or move. It was a challenging time, and urgent action was necessary.
At the time it was considered a disaster, but today it’s widely agreed that withdrawing from the ERM was the correct move. Without the ERM’s stresses, the pound rebounded, interest rates decreased and the UK eventually came out of recession and ultimately continued to grow into the new millennium.
The property market undoubtedly felt the benefit too, with 30 years of house price growth. It created an environment of continued innovation. This resulted in new competitive ranges of valuable mortgage products, and the introduction of buy-to-let, self-cert and adverse credit, all serving niche borrowers who had never before been able to borrow.
Parallels with today
But the whole fiasco serves as an important reminder and gives fantastic perspective on the current landscape. While the pound may be struggling today and interest rates only look set to continue rising, it’s a stark reminder of just where rates used to be.
I remember buying my second house, taking out a five-year fixed rate mortgage with Leamington Spa at 13.95 per cent and I thought it was a great deal – I was absolutely chuffed! By the end, rates had come right down to around eight or nine per cent which we thought was great – yet still three times as high as many fixes now.
Story time aside, there are many parallels between then and now – even if the rates are different. The most apparent is the need and desire for solid financial advice.
The main difference is homeowners today don’t have a high street full of banks to investigate. Instead, there are hundreds of more niche, intermediary-only lenders that most borrowers will never have heard of. This makes the role of brokers and advisers absolutely vital.
In fact, we’re hearing from our nationwide network of brokers that customers are acting with real urgency to seek advice before rates rise further.
There’s no question it’s a challenging time and lenders will have to find more inventive ways to lend as things clearly get tighter. But even so, I don’t think we’ll go back to how things were in the 90s, or even before the financial crash.
As much as lenders need to adapt to ensure this, brokers need to be responsible and play their part too. While we’re all commercial entities and we want to create profits, we must still put our clients first and work in their best interest.
It’s more than just checking they can afford the mortgage. With various lenders adopting different criteria, there’s a clear distinction between making it fit and doing the right thing for the customer.