When Did the Borrower Start Carrying All the Risk?

Looking back at buying homes in Britain and New Zealand — and wondering how mortgages became what they are today

I have been thinking about mortgages lately.

Not because I am looking to buy another home. In fact, I have been quite happy renting for many years. The last home I owned was sold after my final restaurant failed, and since then, renting has suited me quite well.

What I do have a problem with is the cost of housing today.

The issue of affordable housing has put me on something of a bandwagon. When I look at what ordinary people are expected to pay for a home today, whether they are buying or renting, I sometimes wonder how we got here.

And perhaps my feelings about mortgages come from my own experiences many years ago.

Buying homes when I was young

My first experiences of buying a home go back to the 1960s in Britain. Between about 1962 and 1967, I managed to buy and sell three homes before eventually emigrating to New Zealand.

When I arrived in New Zealand in 1968, I bought my first home there. I believe the mortgage was through the State Advances Corporation, the government lending organisation that played a major role in providing housing finance at the time.

I went on to buy and sell several more homes during the 1970s and into the 1980s.

Eventually, I became freehold.

Now, I'm not claiming that everything was perfect in those days. It certainly wasn't.

But one thing I remember is that I didn't spend my life worrying about what the bank was going to do to my mortgage repayment next month.

New Zealand's financial system was heavily regulated during much of this period. Interest rates and lending were subject to controls, and the financial system wasn't operating in the same market-driven way it does today. Major financial liberalisation came in the 1980s.

That makes me wonder whether we have gradually moved from a system where the lender and borrower both knew reasonably clearly what they were getting into, to one where much more of the risk sits with the borrower.

And then came the modern mortgage

Today, when you apply for a mortgage, the bank doesn't simply hand you the money.

It assesses your income, expenses, assets, liabilities and ability to service the loan. You have to satisfy its lending criteria before it will agree to lend you the money.

Once you pass all those tests and sign the agreement, however, there is an important distinction between a fixed-rate mortgage and a variable-rate mortgage.

With a variable-rate mortgage, the interest rate can change.

And that is where I start asking questions.

The Reserve Bank of Australia explains that changes in the cash rate flow through to banks' funding costs and lending rates. Banks fund themselves through deposits, debt and equity, so their funding costs can change as interest rates change.

I understand that argument.

But consider the position of the borrower.

You borrowed $400,000.

The bank assessed you and decided you could afford the repayments.

You signed the mortgage.

You received the $400,000.

You haven't gone back to the bank and asked for another $100,000.

Yet if you have a variable-rate mortgage, your repayment can increase substantially because interest rates have risen.

You still owe roughly the same amount of money. Your circumstances may not have changed. But the cost of servicing that debt has changed.

And that is the part I find difficult.

Who carries the risk?

I am not suggesting that banks have no costs when interest rates rise. That would be too simple.

The RBA's own research indicates that banks' funding costs generally move with the cash rate, and that changes in cash rates are passed through to variable mortgage rates.

But it does leave me wondering whether the balance of risk has shifted too far towards the borrower.

The borrower has already gone through the bank's assessment process.

They have already committed themselves to the loan.

They have already agreed to repay it.

Yet the repayment they have to find each month can subsequently rise because of decisions made by the central bank in an attempt to control inflation and the wider economy.

I realise that monetary policy has to work somehow. The Reserve Bank cannot simply ignore inflation.

But I can't help wondering whether there could be a better balance between protecting the banking system and protecting the ordinary person who has borrowed money to buy a home.

And then there is renting

Perhaps my interest in this subject is really coming from where I find myself today.

I am no longer a homeowner. I rent, and I am quite happy to rent.

What I don't like is watching rental prices rise to a point where ordinary people, particularly retirees, can struggle to find somewhere they can afford.

That is why affordable housing has become important to me.

I find myself looking back at the different housing systems I have lived through and asking:

What happened?

When I was buying homes in Britain and New Zealand, I never imagined that, many decades later, I would be sitting in retirement thinking about whether I could afford the rent on the home I live in.

Maybe times change.

Maybe financial systems have to change.

Maybe there are very good reasons for the system we have today.

But sometimes I think we have become so used to the way things work that we forget to ask whether there might be a fairer way.

And perhaps that's the question I really want to leave you with.

When it comes to housing, mortgages and retirement, have we put too much of the risk onto the ordinary person?