Homeowners in Scotland could face average annual mortgage increases of almost £5,200 under independence if the Scottish Government walks away from its share of national debt, Chief Secretary to the Treasury Danny Alexander has warned.
Mr Alexander said any threats by Scotland’s First Minister Alex Salmond to refuse to take a share of the debt as a result of the UK Government’s rejection of a currency union could have a “huge effect on mortgages and businesses”.
The Chief Secretary was appearing at Holyrood’s Economy Committee to give evidence on Scotland’s economic future post-2014.
Chancellor George Osborne has already warned that even if a new Scottish state accepted its share of UK debt, it would have to pay an ‘’independence premium’’ to borrow from the markets.
This would mean an extra £1,700 a year for the average mortgage-payer, Mr Osborne said.
Mr Alexander told the committee that new independent analysis from Jefferies investment bank suggests this figure could rise considerably if a share of debt was refused.
“In the event of a default, of a refusal to accept debt, one bank, Jeffries investment bank, has done the only detailed estimate out there - they have suggested that under those circumstances there would be a premium of more like five percentage points in that default scenario,” Mr Alexander said.
“If you run that through the calculator in terms of how that gets passed on to the real economy... it would have a huge effect on mortgages and businesses.
“Assuming a 75% pass through from bond rates to mortgage rates would be an extra cost of about £5,200 on an average mortgage cost in Scotland.
“None of these things are certain, but you see the range of financial risks that come with borrowing under an independence framework.”
Mr Alexander said: “The idea that you would start your life as a new nation state like that would be cutting off your nose to spite your face.
“The expectation within the markets is that part of the proper process of independence is taking on a fair share of the debt, and in the end market credibility and confidence is based on the perception that a country is willing to take on its financial obligations.”