Holding back on state handouts to those facing mortgage misery is the right thing to do, as harsh as it sounds - Jayne Dowle
Being only 24 at the time, and rather more interested in having fun than fiscal niceties, I was blithely unaware of the scale of the crisis unfolding; the day began with interest rates already at 10 per cent, rising to 12 per cent by lunchtime, before climbing another three points by late afternoon.
The UK was forced to withdraw the devalued pound from the European Exchange Rate Mechanism (ERM). There was much gnashing and grinding of teeth. The then-Prime Minister, John Major, retreated to consider his position.
But with a lot of intervention, the economic landscape settled down and eventually, interest rates were cut to seven per cent, inflation dropped and the country witnessed an economic recovery that brought with it a new sense of enterprise and self-confidence.
I relate all this because everything goes in cycles. Right now, we are probably about to hit the bottom of the curve.
Homeowners with mortgages are facing nightmarishly high borrowing costs; on Monday this week, rates on two-year fixed mortgages rose above six per cent, due to continued inflation. That’s more than doubled in two years, when homeowners would have set budgets which they could then afford.
The problem is, ordinary people are being massively impacted by matters entirely beyond their control. The question is, should it be the government’s job to help out?
By the end of this year, financial markets expect the Bank of England base rate to rise from 4.5 per cent to nearly 5.75 per cent, so the pain is only going to get worse, especially for those seeking a new mortgage deal.
According to the Resolution Foundation, a think tank, about 4.2 million households will already have experienced an average annual repayment increase of £1,500 since December 2021.
Over the next year, during which another 1.3 million mortgage-holders will need to remortgage, it is estimated that average repayments will go up by a further £2,900, or more than £200 per month.
Wiser old economic hands than me are telling the Government to hold fire when the possibility of state-backed handouts for those facing mortgage misery is mooted.
And harsh though this sounds, this is the right response. Handing over cash lump sums, as the Government did to help alleviate unprecedented home energy costs last year, contributes to public borrowing, putting further pressure on the checks and balances of the wider economy. There is a price to pay for everything.
However, we all need power and heat to survive in our homes, regardless of whether we own or rent, work, claim benefits or are retired. The fuel emergency payments were generally universally fair, in that in one form or another, they benefited everyone.
Mortgage support, however, would help only those with mortgages; not the millions living in rented accommodation (many because they cannot afford to buy their own home), or those without mortgages, especially older homeowners who rely on pensions.
It also strikes as rather too much of an easy fix. Throwing money at the problem, instead of tackling the root cause, gets ministers off the hook. What the Government really should be doing is looking at two major issues.
One, that mortgage rates are so arbitrary and rely so much on the whims of both the Bank of England and individual banks and building societies, which can offer and update products on whatever terms they care for.
Obviously, I’m not an economist so don’t have any magical solutions on how to keep wider woes away from monthly direct debits.
However, it does seem to be a largely unfettered marketplace, where lenders hold all the power with borrowers are entirely in thrall. There must surely be a more steady and equitable way of offering finance for what is usually our biggest investment.
And two, when homeowners take out a mortgage it’s a contract between themselves and their lender. A consumer deal. Neither the Bank of England nor the Chancellor of the Exchequer’s names are on the deeds.
So therefore, pressure should be exerted on banks and building societies to help their own customers.