Additional piece:
The UK mortgage market is facing a potential crisis as rising interest rates and inflation put pressure on households. Chancellor Jeremy Hunt has called on banks to address the issue, but has ruled out providing fiscal support. Instead, he wants to help the Bank of England tackle inflation by not injecting more money into the economy. This decision has raised concerns among economists who believe that inflationary pressures are still too strong and that further interest rate hikes are imminent.
The official inflation rate for May is expected to fall slightly from 8.7% to 8.4%. However, this decline is unlikely to be enough to prevent the Bank of England from raising interest rates by another 0.25 percentage point to 4.75%. This would be the highest level since 2008. Many households are already struggling with their monthly mortgage repayments, and the situation is only set to worsen with the potential for further rate hikes.
Conservative MPs have called for the reinstatement of a Thatcher-era tax break called mortgage interest relief at source to reduce monthly repayments. However, Chancellor Hunt rejected this proposal, stating that he wants to avoid prolonging the inflationary agony that people are already experiencing.
Instead, the Chancellor plans to meet with big lenders to assess the state of the mortgage market and explore options for providing further help to individuals struggling with their monthly payments. Several lenders have already raised the cost of their mortgage products following poor inflation data and the expectation of further rate hikes.
While some lenders are open to providing tailored support, others are more skeptical about the effectiveness of these measures. There is a concern that the Chancellor’s talks with lenders may not yield meaningful results and that he is merely playing for public approval.
Various options are available to lenders, such as offering extensions to mortgage terms or switching to interest-only repayment holidays. However, the City of London minister Andrew Griffith has stressed that any recovery should only be considered as a last resort. The focus should be on finding long-term solutions to alleviate the mortgage crisis rather than temporary fixes.
There have been suggestions that fixed-rate mortgages, particularly those spanning 25 years, could help ease the situation. However, Treasury officials argue that such mortgages already exist in the market but have not proved popular due to consumer demand. The idea of a “lifetime” mortgage, proposed in the Conservatives’ 2019 election manifesto, may also be considered in the future, but only if interest rates fall significantly.
Industry experts believe that the government needs to intervene and stimulate the mortgage market. Richard Donnell, director of research at real estate website Zoopla, argues that the government should take action to boost the market as he does not believe it will recover on its own. This view is echoed by Labour Treasury spokesman Pat McFadden, who blames the government’s economic policies for driving up mortgage rates.
Bank executives have differing opinions on the Chancellor’s move to hold talks with lenders. Some believe it is necessary and expect their companies to provide support to struggling borrowers. Others are more critical, dismissing the talks as a mere gesture and claiming that lenders are already doing their best to prevent foreclosures.
Despite concerns about the mortgage market, Treasury officials find solace in data showing that home foreclosures and mortgage payment arrears remain below pre-pandemic levels. Prime Minister Rishi Sunak remains committed to halving inflation by the end of 2023 as the best solution to address the mortgage problem. However, there is growing pressure from Conservative MPs as they prepare for the 2024 general election, with fears that a “mortgage bomb” is about to go off.
Summary:
The UK mortgage market is facing significant challenges as rising interest rates and inflation put pressure on households. Chancellor Jeremy Hunt has urged banks to address the issue but ruled out providing fiscal support. The Bank of England is expected to raise interest rates by another 0.25 percentage point to 4.75%, the highest level since 2008. Hunt rejected calls to reinstate a Thatcher-era tax break for mortgage interest relief. Instead, he plans to meet with lenders to assess the state of the mortgage market and explore options for further assistance. However, there are concerns about the effectiveness of these measures and skepticism among some lenders. Fixed-rate mortgages and longer-term solutions have been suggested but have not gained popularity. Industry experts argue that government intervention is needed to stimulate the mortgage market. However, Treasury officials find comfort in data showing that home foreclosures and arrears remain below pre-pandemic levels. Prime Minister Rishi Sunak remains committed to halving inflation as the best way to address the mortgage problem.
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Chancellor Jeremy Hunt will call on banks to deal with what a Conservative MP has called a “mortgage bomb about to go off” but has ruled out providing fiscal support to households grappling with rising mortgage costs.
Hunt on Tuesday said he wanted to help the Bank of England “strangle” inflation and that pumping more money into the economy would put additional upward pressure on prices e interest rates.
The official inflation rate for May will be released on Wednesday, with economists expecting the headline rate to fall from 8.7% to 8.4%.
The decline is unlikely to be enough to prevent the Bank of England from raising interest rates on Thursday by another 0.25 percentage point to 4.75%, its highest level since 2008, amid concerns that underlying inflationary pressures are still too strong.
Hunt on Tuesday rejected calls by Conservative MPs to reinstate a Thatcher-era tax break – called mortgage interest relief at source – to cut monthly repayments. The tax advantage was abolished by Labor Chancellor Gordon Brown in 2000.
“We will do nothing to prolong the inflationary agony people are going through,” Hunting he told MPs on Treasury Questions in the House of Commons.
Instead, the chancellor will call the big lenders on Friday to assess the state of the mortgage market and see what further help they can give to people grappling with their monthly payments.
The cost of a two-year fixed-rate mortgage in the UK rose on Monday above 6 percent for the first time since December.
Virgin Money on Tuesday became the latest lender to raise the cost of its mortgage products after financial markets raised their expectations of further interest rate hikes by the BoE following poor inflation data.
A senior executive at a major bank said the chancellor’s move to hold talks with lenders was not surprising.
He added that there were various ways his company could help families with their mortgages, but he said the arrears weren’t increasing.
Other lenders were more skeptical of the move.
“He’s nothing but the clerk playing for the crowd,” said a bank executive who added that lenders were already doing their best to avoid foreclosures. “He’ll just let him prove that he’s doing something.”
Under a December 2022 agreement between banks, regulators and Treasuries, lenders are required to offer tailored support to those struggling to pay off their mortgages.
City of London minister Andrew Griffith said lenders could offer extensions to mortgage terms or switch to interest-only repayment holidays. “Any recovery should be an absolute last resort,” he added.
Meanwhile, there has been only tepid support from the Treasury for the suggestion by Michael Gove, the Cabinet minister responsible for housing, that 25 years old fixed rate mortgages could help alleviate the situation.
Griffith said long-term fixed-rate mortgages already existed on the market, but that “the constraining factor is consumer demand.” He added that they hadn’t proved very popular.
The idea of a “lifetime” mortgage was proposed in the Conservatives’ 2019 election manifesto, but Treasury insiders said markets should settle – in other words, interest rates should fall sharply relative to theirs. current levels – before it was likely to be popular.
Richard Donnell, director of research at real estate website Zoopla, said spending 10- or 20-year loans discouraged borrowers from breaking the habit of choosing cheap short-term deals and hoping rates would drop next time. .
“My view is that the government needs to go in and pump this market up to open it up,” he added. “I don’t think the market will get there by itself.”
Labor Treasury spokesman Pat McFadden said the UK was still paying the price for a “gigantic economic experiment” conducted last year by former prime minister Liz Truss, which drove up mortgage rates.
The issue is also starting to worry Conservative MPs as they prepare for a general election scheduled for 2024. Sir Jake Berry, a former Conservative minister, said “a mortgage bomb is about to go off”.
But Treasury officials took some comfort in data showing home foreclosures and mortgage payment arrears are below pre-pandemic levels.
Prime Minister Rishi Sunak has insisted that his pledge to halve inflation by the end of 2023 to around 5.5% is still on track and that this is the best way to tackle the mortgage problem.
Downing Street said the government was doing a lot to help people with the cost of living crisis, but signaled no plans to go beyond existing plans.
Additional reporting by Jim Pickard and Siddharth Venkataramakrishnan
https://www.ft.com/content/cf83318a-23d7-4bc6-8fa7-6432b2f40531
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