Labour’s “five-point plan” to ease the pain in the mortgage market can be boiled down to a single idea: get heavy with the lenders – the banks and building societies – to make them play nicely with over-stretched borrowers.
One cannot call it a radical idea, however. First, it’s in the interests of lenders themselves, up to a point, to be flexible by, say, lengthening the term of the loan, granting a payment holiday or allowing a borrower to switch to interest-only arrangements for a while. Second, many banks say they already have such policies in place, even if critics say they’re not advertising them with enthusiasm.
Ultimately, though, the worst outcome for banks would be a demand-crushing crash in the value of houses. They would also definitely wish to avoid a situation in which politicians start to ask if their fabled “affordability checks” on home loans were up to scratch.
And the good news is that lenders can definitely tolerate a round of political arm-twisting that demands greater levels of forbearance. A feature of the current rate-hiking cycle that began in December 2021 is the remarkably low level of bad debts and defaults that have appeared.
On the business side of their lending books, banks did not see the pandemic-created defaults they imagined at the outset. “Resilience” is a commonly used word by banks in recent quarterly reports about commercial lending. On the mortgage and consumer side, unemployment has always been the best predictor of defaults: since we currently have the lowest levels of unemployment since the mid-1970s, the picture has also been solid there.
Meanwhile, net interest margins – the difference between what a bank pays to depositors and what it charges on loans – have been rising. So, yes, if forbearance requires banks to absorb a few costs, they can afford it. Labour is pushing in the right direction, even as it accepts “some lenders are offering similar measures” to the ones it proposes and that this is really about creating a uniform approach.
The interesting part of the plan, then, comes down to its urging of the government to tell the Financial Conduct Authority, the chief financial regulator, to issue a formal instruction to lenders that borrowers’ credit score should be unaffected, a point made by campaigner Martin Lewis. Borrowers would get a right to request a temporary interest-only arrangement or a longer repayment term; lenders would have to wait six months before initiating repossession proceedings. Measures would be reviewed after 12 months.
Would an FCA order, as opposed to the usual regulatory “guidance” to treat customers fairly, help? Possibly: borrowers could enter a conversation with their lender knowing what to expect. And the six-month non-repossession measure might offer a degree of comfort, even if lenders say a repossession process already takes longer.
But let’s not pretend that Labour has somehow discovered an ingenious way to defuse the “mortgage timebomb”. An ability to defer or smooth payments is only an indirect form of support: the interest and principal still have to be paid eventually. Like the prime minister, Rishi Sunak, and chancellor, Jeremy Hunt, Labour seems to have concluded that offering direct support for mortgage holders cannot be justified.
Quite right too: there’s no point in having the government and the Bank of England pull in opposite directions, and direct handouts for homeowners is surely a non-starter when renters tend to be poorer. It is only a handful of Trussite Tory MPs (and, oddly, John McDonnell, Labour’s former shadow chancellor) who are flirting with the idea of reintroducing tax relief on mortgage interest.
The Labour leadership, then, is within the consensus that says help for homeowners should take the form of tweaks to mortgage terms. Still, it’s smart politics to be seen to crank up the pressure on the banks. Hunt is meeting their chief executives on Friday. The chancellor will now be under more pressure to produce something meatier than the loose “commitments” that usually emerge from such encounters.
