16 February 2012

A New Stimulus: Quantitatively ease my mortgage

As we are coming up to budget time and the UK economy continues to go to hell in a hand cart, I thought I would take a little time out to help Chancellor of the Exchequer, Gideon Osborne, get the economy going again while simultaneously winning some votes. I’m not going to list all the economic leavers, or opine on the theory of fiscal and monetary policy. 


I am suggesting just one way to put money in the pockets of families that will make a significant contribution to increasing aggregate demand and getting our economy moving again.

It’s a kind of quantitative easing that will not just work, but actually feel like it’s working.

A large number of my colleagues were just told they are likely to be laid off. As relieved as I am not to be directly impacted, I was laid off in December 2009 and also faced something similar about 18 months before that. But despite this, like many other white collar middle class homeowners I have done everything I can to make sure my mortgage is paid. We have sold our second car and settled for short, domestic holidays. We have scaled back every utility and every luxury. We don’t go out, we and we make do and mend.

While my gross salary has remained static since 2008, I estimate my net salary as reduced by around 12% in real terms. We have lost our family allowance and we have paid our increased direct and indirect taxes. Our credit rating is intact and we continue to be net contributors to the exchequer.

So now it’s time for our payback, and it won’t cost the Government a penny. The mortgage I have worked so hard to cover is provided by RBS. The bank that the Government holds around 80% of the shares on my behalf.  I have a fixed rate mortgage at around 5% because when we took it out we were curiously optimistic about the economy and thought interest rates could rise. I know, not the best decision with hindsight. If we were on the bank’s tracker rate we could be saving around £300 per month.

That’s around £7,000 per annum in gross salary we could have made available to us. However, to access this deal I would have to pay more than that in penalties. Now RBS and the other virtually nationalised bank, Lloyds HBOS, represent about 40% of the UK mortgage market. So imagine the aggregate demand that could be generated if people like me could simply remortgage, keeping the same term, but at a lower interest rate and without the penalties?

Now I’m not completely naïve, I know there are counterparties to my mortgage holding bonds etcetera. But it strikes me that buying their paper is a wholly more popular and real use for the £50 billion the Bank of England has just spunked on buying back Government debt form pension funds that they call quantitative easing.

And it doesn’t have to stop with these two banks. If the Government hadn’t shored these institutions up Barclays and HSBC would have gone the same way. I can’t think of a better way to offset the unpopularity of the bonuses of all banks than by rewarding those people that have done everything they can to keep their heads above water in one of the toughest economic environments for several generations.