How to solve the mortgage crisis: Three different approaches
Should the government step in directly with mortgage support, force lenders to further help borrowers or leave borrowers to go it alone?
We all know that many mortgage borrowers are going to be hit hard by the sharp increases in rates.
What was a bad situation has been made worse by the latest rise in the Bank of England Base Rate to 5%.
What we don’t know is how high mortgage rates will go, when they will peak and when they might start to fall. But the consensus seems to be that this could go on for some time, as inflation remains sticky.
There are still hundreds of thousands of borrowers due to come to the end of their deal this year. They will need to remortgage if they don’t want to revert to their lender’s standard variable rate – currently averaging 7.53%, according to Moneyfacts.
Even borrowers who don’t need to remortgage this year are beginning to worry about their options in 2024 and beyond.
So what will happen if borrowers can’t pay?
And how can the crisis be solved?
Impact on borrowers
Some borrowers will of course be able to manage the higher fixed rates on offer and will cut their cloth accordingly.
But it’s clear that not everyone will be able to meet hugely increased monthly repayments of potentially hundreds of pounds, especially in the context of higher food and energy prices.
The Institute for Fiscal Studies has said that 1.4 million people could lose 20% of their disposable income to rising mortgage payments, with mortgage holders in their thirties and in London hit hardest.
By the end of 2023 more than a million households (four per cent of all UK households) will run out of savings because of higher mortgage repayments, according to the National Institute of Economic and Social Research (NIESR).
Obviously, this could mean a rise in mortgage arrears and potentially repossessions, but borrowers, lenders and the government all want to avoid that.
Lenders are already working hard to support borrowers who are worried about their repayments. But there are calls for this forbearance to be made more structured and compulsory.
How can borrowers be helped?
Labour said it would force lenders to allow borrowers to switch to an interest-only mortgage or lengthen their term to reduce monthly repayments (many are already doing this in practice but Labour wants to see it become compulsory).
Shadow Chancellor Rachel Reeves said that borrowers should then be able to switch back if the situation gets better, and shouldn’t be penalised on their credit record for making the changes. She added that she would also make banks wait for at least six months before starting reposession proceedings.
That’s one potential approach.
Others think the government needs to take more direct action to support borrowers, either through the reintroduction of MIRAS, introducing affordable payment plans for borrowers or by taxing the banks and using the money raised to help homeowners.
The latter is being called for by the Liberal Democrats, which has called on Jeremy Hunt to reverse the £3bn of tax cuts being given to banks this year, and use the money to help struggling homeowners at risk of losing their homes.
Liberal Democrat Treasury Spokesperson Sarah Olney MP said: “The Chancellor needs to bring forward concrete measures to help people at risk of losing their homes, or else this summit risks being nothing less than a PR gimmick.
“That must start with reversing the massive tax cuts being given to the big banks and using the money raised to help struggling households.
“It beggars belief that the Conservatives are choosing to hand billions of pounds of tax cuts to the banks, while refusing to help families worried sick about keeping a roof over their head.”
Max Mosley, NIESR Economist, added: “No lender would expect a household to withstand a shock of this magnitude, so the government shouldn’t either. Some investment should be done in forbearance agreements, giving households and lenders the ability to create payment plans that work for each other.”
Finally, there are many people who don’t believe the government should intervene in the mortgage market directly or indirectly, especially when renters have also faced higher costs without similar support.
The Chancellor’s mortgage summit on Friday gave us more information. The government has reportedly ruled out direct government support for mortgage borrowers, although it has agreed with banks that they will boost their forbearance measures.
Help at hand
In the meantime, if you are worried about paying your mortgage, call your lender as soon as possible.
If you are concerned about getting a new mortgage or remortgaging at the end of your current deal, speak to a broker for advice.