A US-style house price disaster is headed for Britain, and the damage will be deeper

Longer-term solutions in the US are possible through a different mortgage financing model than in the UK, where home loans are backed by checking accounts and short-term fixed-rate deposits.

Christian Hilber, a university professor at the London School of Economics, said: “In the US, they sell their mortgages to Fannie Mae and Freddie Mac (companies that guarantee most US mortgages). They then pool these mortgages together and sell the risk to investors. This allows them to spread the risk.”

The system has its flaws, of course. During the 2007 financial crisis, the subprime mortgage market crashed and lending was frozen. This was exacerbated by lax regulation, much like in the UK, which had allowed lenders to issue mortgages based on shaky affordability.

But Professor Hilber said it allows US borrowers to lock in fixed interest rates for a long time. The professor added: “The UK market is diametrically different, with the typical mortgage being a two-year fixed rate, a teaser rate, before moving to a variable.

“This means that in the UK many more borrowers are much more exposed to interest rate risks. Therefore, many more low- and middle-income households will face difficulty paying their mortgages and experience hardship as a consequence.

“It’s an additional consideration that the Bank of England has to take into account, which makes fighting inflation even more difficult.”

America spreads pain, UK doesn’t

Arjan Verbeek, of long-term mortgage firm Perenna, said this system allows the United States to spread the pain of financial hardship across its population more evenly than the UK, which simply cannot.

He said: “The United States is a more diversified and energy independent economy. It also has a predominantly long-term, fixed-rate mortgage market that allows the Federal Reserve to raise rates and the pain is spread relatively evenly across the economy.

“When the Bank of England raises interest rates, the pain is mainly felt by mortgage borrowers.”

The Bank of England has said four million borrowers have yet to feel the pain of higher mortgage payments, with some four million affected so far.