2023-06-20 19:07:18
Chancellor Jeremy Hunt is to call in banks to address what one Tory MP called a “mortgage bomb that is regarding to go off”, but he ruled out giving fiscal support to households struggling with the rising cost of mortgages.
Hunt said on Tuesday he wanted to help the Bank of England “strangle” inflation and that pumping more money into the economy would put further upward pressure on prices and interest rates.
The official inflation rate for May will be published on Wednesday, with economists expecting the headline rate to fall from 8.7 per cent to 8.4 per cent.
The drop is unlikely to be sufficient to stop the Bank of England raising interest rates on Thursday by another 0.25 percentage point to 4.75 per cent, the highest level since 2008, because of concerns that underlying inflationary pressures are still too strong.
Hunt on Tuesday rejected calls from Tory MPs to bring back a Thatcher-era tax break — called mortgage interest relief at source — to cut monthly repayments. The tax perk was abolished by Labour chancellor Gordon Brown in 2000.
“We won’t do anything that will prolong the inflationary agony that people are going through,” Hunt told MPs at Treasury questions in the House of Commons.
Instead, the chancellor will call in big lenders on Friday to assess the state of the mortgage market and to see what additional help they can give people struggling with their monthly payments.
On Monday, the cost of a two-year fixed rate mortgage in the UK rose above 6 per cent for the first time since December.
Virgin Money on Tuesday became the latest lender to raise the cost of its mortgage products following financial markets raised their expectations of more interest rate rises by the BoE following poor inflation data.
One senior executive at a main bank said the chancellor’s move to hold talks with the lenders was unsurprising.
He added there were various ways his company might assist households with their mortgages, but said arrears were not increasing.
Other lenders were more sceptical of the move.
“It’s nothing more than the chancellor playing the crowd,” said one bank executive who added that lenders were already doing their utmost to avoid repossessions. “It will just allow him to show he’s doing something.”
Under a December 2022 agreement between banks, regulators and the Treasury, lenders are required to offer tailored support to those struggling to pay their mortgages.
Andrew Griffith, City of London minister, said lenders might offer mortgage term extensions or a switch to interest-only repayment holidays. “Any repossessions should be an absolute last resort,” he added.
Meanwhile, there was only lukewarm Treasury support for the suggestion by Michael Gove, the cabinet minister responsible for housing, that 25-year fixed rate mortgages might help alleviate the situation.
Griffith said there were already long-term fixed rate mortgages on the market but that “the constraining factor is consumer demand”. He added they had not proved very popular.
The idea of a “lifetime” mortgage was proposed in the Conservatives’ 2019 election manifesto, but Treasury insiders said markets would have to settle — in other words, interest rates would have to come down considerably from their current levels — before they were likely to be popular.
Richard Donnell, research director at property website Zoopla, said the expense of 10 or 20-year finance discouraged borrowers from breaking the habit of picking cheap short-term deals and hoping rates would come down next time round.
“My view is the government has to come in and pump-prime this market to open it up,” he added. “I don’t think the market will get there on its own.”
Labour’s Treasury spokesperson Pat McFadden said the UK was still paying the price for the “giant economic experiment” conducted by Liz Truss, former prime minister, last year, which forced up mortgage rates.
The problem is also starting to worry Conservative MPs as they prepare for a general election expected in 2024. Sir Jake Berry, a former Tory minister, said there was “a mortgage bomb regarding to go off”.
But Treasury officials have taken some comfort from data showing home repossessions and arrears on mortgage payments are below pre-pandemic levels.
Prime minister Rishi Sunak has insisted his pledge to halve inflation by the end of 2023 to regarding 5.5 per cent is still on track, and that this is the best way to address the mortgage problem.
Downing Street said the government was doing much to help people with the cost of living crisis, but has not signalled any intention to go beyond existing plans.
Additional reporting by Jim Pickard and Siddharth Venkataramakrishnan
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