Mortgage crisis: PM and chancellor face conundrum as rates rise – and there’s no silver bullet to end the crisis
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by 0 The prime minister and his chancellor find themselves in something of a conundrum.
They have committed themselves to halving inflation this year – without referring to the fact this is actually something the politicians outsourced to the Bank of England 25 years ago – even, if the chancellor is to be believed, this comes at the price of a recession.
At the same time, however, they would like to see this being done without too much pain for homeowners whose mortgage rates are spiralling ever higher.
Accordingly, Jeremy Hunt will be welcoming, if that is the right word, executives from the financial services industry to 11 Downing Street on Friday to discuss ways of helping homeowners with their mortgages.
That poses a particularly difficult problem: how to mitigate the impact of higher interest rates while doing nothing to blunt their impact on the broader economy in the battle against inflation.
Several possible solutions are already doing the rounds.
One idea, mooted by some Conservative backbenchers, has already been dismissed by the chancellor. This would be to disinter Mortgage Interest Relief At Source (MIRAS).
This was a scheme originally launched by Roy Jenkins, a former Labour chancellor, in 1969 as a way of encouraging home ownership. It enabled homeowners to set a portion of the interest payable on their mortgages against their income tax bill.
It was a particularly valuable tax break at a time when personal tax rates were so high. In 1983 under Sir Geoffrey Howe, a former Conservative chancellor, the allowance on which relief could be claimed was increased and extended to allow couples with joint mortgages to pool their allowances.
This latter perk was abolished by his successor Nigel Lawson in 1988, but the decision to pre-announce the move led to a rush of people borrowing more. It contributed to the housing market crash that began in late 1989.
By then, MIRAS was already a hot potato, not least due to its cost.
An inquiry by the National Federation of Housing Associations, chaired by the late Prince Philip, recommended scrapping MIRAS as long ago as 1985 – but was squashed by ministers well aware of its popularity.
Margaret Thatcher, the prime minister of the day, told the House of Commons on the day the report was published: “So long as I am here, mortgage tax relief will continue.”
But the growing cost of MIRAS – and its ability to stoke house price inflation – meant its days were numbered.
Ken Clarke, chancellor from 1993 to 1997, wanted to abolish the tax break but was prevented from doing so by his party’s MPs. That was left to Gordon Brown, who abolished MIRAS in 2000, arguing it was a middle-class perk.
Mr Brown’s thinking was echoed this week by Mr Hunt.
It is hard to think how any chancellor could fairly offer a generous tax break to homebuyers while not also providing financial support to the millions of renters also struggling with increased living costs. Reviving MIRAS would also be unaffordable when the government is routinely borrowing vast sums – as well as risking further stoking house price inflation.
It is also questionable whether MIRAS would make that much of a difference to the finances of homeowners struggling with their mortgages.
By the time Mr Brown abolished it, successive governments had already trimmed its generosity, to the extent that it was worth only £24 per month to the average homeowner – and, even then, it still cost the Treasury getting on for £2bn in today’s money. A more generous scheme would cost considerably more.
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Rachel Reeves, the shadow chancellor, has come up with a package of five proposals that would require lenders to allow borrowers struggling with their mortgage to temporarily switch to interest-only payments; to allow borrowers to lengthen the term of their mortgage period; to reverse any support measures when the borrower requests; to wait a minimum of six months before initiating repossession proceedings, and ordering the Financial Conduct Authority to ensure any homeowner taking advantage of such moves would not hurt a borrower’s credit rating.
Those proposals, as it happens, are not that different from the kind of measures that UK Finance, the industry body for the financial services sector, envisages being implemented if more homeowners do start to struggle with mortgage payments.
It has said lenders stand ready to offer “part payment” plans, under which borrowers pay a reduced amount covering the interest and some of the loan amount, or mortgage term extensions where the length of the mortgage is extended to reduce the monthly repayment amount. It too is also offering temporary switches to interest-only mortgages and payment concessions where appropriate.
The similarity between the industry’s proposals and those made by the shadow chancellor is not a coincidence. Earlier in her career, Ms Reeves worked for Halifax, the UK’s biggest mortgage provider, where during the global financial crisis she witnessed first-hand the pain that was being felt by homeowners as mortgages became more scarce.
Both sets of proposals will be seen as pragmatic and not least because they do not imply a rise in government spending.
Another proposal, favoured by, among others, the Housing Secretary Michael Gove, is for the widespread take-up of 25 or 30-year mortgages along the lines of those common in the US.
This, like bringing back MIRAS, is not a particularly new idea.
Mr Brown commissioned David Miles, a former member of the Bank of England’s Monetary Policy Committee, to look into the viability of longer-term fixed-rate mortgages as long ago as 2003.
Such mortgages do exist already and are provided by specialist lenders.
But take-up of such products has been low because customers have tended, in the past, not to regard them as good value. Were the government looking to encourage take-up, there are also structural issues in the mortgage market that would need addressing.
In the UK, banks finance mortgages using the deposits of savers. In the US, lenders borrow to finance the mortgages they provide, with government-sponsored bodies like Fannie Mae and Freddie Mac parcelling up their home loans and selling them on.
Something like that might be needed here were there to be widespread take-up or 25 or 30-year mortgages.
There is also a cultural factor at play here. British mortgage borrowers are more culturally attuned to shopping around for shorter-dated fixed rate deals than applying for 25 or 30-year mortgages. They also tend to borrow as much as they can when taking out a mortgage. In European countries – where longer-dated mortgages are more common than in the UK, such as France – there tend to be quite strict limits on how much can be borrowed.
So don’t fall for thinking there is a magic bullet to solve the problems of homeowners struggling to keep up their mortgage payments.
The best that can be hoped for, in all probability, is greater flexibility on the part of lenders.
