Britain’s mortgage time bomb

A sticky situation

Britain's inflation is proving very sticky indeed and is the worst in the G7. Yesterday, we learned that inflation failed to fall as hoped in May, with the annual CPI rate stuck at 8.7% – well over the UK's 2% target.

This news was unlikely to improve the image of the Bank or its governor, Andrew Bailey. Already there were rumblings of criticism among Conservative MPs that he had been too slow to raise the rate because he assumed the inflation was transitory.

Moreover, at the time of the Liz Truss premiership, when her chancellor, Kwasi Kwarteng, introduced what was known as the 'mini-budget,' the government were already dropping ominous hints that the central bank's independence might be reviewed.

While it is easy to scapegoat the bank, the origins of this hike are complicated and subject to debate.

Britain's raging inflation has been variously attributed to Brexit, the pandemic, supply issues, the strength of workers' bargaining positions owing to the shortage of candidates for jobs, even the amount people were able to save during recent lockdowns, which means that demand has remained buoyant despite the increase in prices.   

Read more: Economic crisis intensifies Britons' regret over Brexit

Alarming effects

Whatever the origin – and it could easily be all of the above – the effects on households are alarming, both for people starting out on home ownership and for those wishing to remortgage.

In 2023, data from the Bank of England suggests homeowners on fixed-rate mortgages are to face an average repayment increase of £3,000. For the average household, this will mean an increase from £750 to £1,000 per month for mortgage payments.

It's quite possible that the fuse on this particular bomb was lit back in the days of Kwasi Kwarteng when the attempt to cut taxes and stimulate growth resulted in a sudden leap in the yields on government bonds as the market sensed a reckless initiative was afoot.

It didn't help that the treasury seemed so reluctant to submit its growth plan to the scrutiny of the Office for Budget Responsibility.

The Guardian recently cited the case of 'Danny' who says his mortgage adviser tried to get in touch with all his clients after the mini-budget, to alert them to a mortgage cost crisis that would devastate the finances of millions.

"He told us people were in three categories: the ones that didn't return his call and didn't see it as important, the ones too shocked and paralysed to act, and the lucky ones – those who answered and acted promptly."

"It isn't just Liz Truss who we are angry at, it is the 70,000 Conservative party members who selected her, people who are mortgage free and living in the home counties – people who don't know and can't imagine this pain."

It goes without saying that the government will not want to remind the public of the Truss episode, any more than they were keen to extend the shaming of Boris Johnson.

What next?

At present the government, while taking a swing at the BoE, has the look of the proverbial rabbit caught in the headlights.

The Labour Party has set out a five-point plan, though they are unwilling to bail out mortgagees as the Liberal Democrats propose to do, for fear that this would nullify any counter-inflationary effects of raising the base rate.

Instead, they would require banks to allow their lenders to switch to interest-only repayments, extend their mortgage repayment period and reverse these measures at any point. At the same time, the banks would have to wait at least six months before seeking to repossess a property and make sure none of this had an impact on borrowers' credit ratings.

On last night's edition of The Take (Sky News), Rushanara Ali, a Labour MP, complained that the high street banks were profiting from the increased interest rates, yet failing to pass this money on to their savers.

It seems odd, to say the least, that a counter-inflationary measure can be so half-hearted, penalising borrowers yet failing to reward the virtuous. Obviously, the heat in the economy would cool considerably if people were given a real incentive to stop spending and save instead.  

The Labour Party was always going to prefer targeting commercial banks. It was Gordon Brown who gave the BoE its independence after all. Also, they have never forgiven the banks for precipitating the 2008 financial crisis.

John McDonnell, the shadow chancellor under Jeremy Corbyn, has even suggested the banks be subjected to a proper haircut, shouldering the burden of the interest rate rise themselves by cutting rates to their borrowers and making up the shortfall with their own money.

If appeals to do so fall on deaf ears, then McDonnell suggests that the government should get tough and levy an excess profits tax on the sector. 

Of course, there's a slim chance of this happening under a government that, as recently as October of last year, was prepared to crash the economy for the sake of growth… notably, the growth of bonuses in the banking sector.