There will be no government handouts for the hundreds of thousands of homeowners facing crippling increases in monthly mortgage repayments after the Bank of England’s decision to raise rates to 5%. To do so would defeat the object of the interest rate rise – to cool down the economy – and prolong the inflation crisis. Further rate rises look likely as inflation proves more sticky in the UK than many other high-income economies.
The government is instead opting to get the UK’s major banks to agree to a voluntary “mortgage charter”. This involves offering forms of temporary relief such as short-term switches to interest-only repayments, as well as extending the period between missed payments and forcible home repossession. Labour has proposed a similar response. This is sensible. Banks should be well placed to absorb some reductions in returns, being better capitalised and enjoying high returns on their lending on the back of recent interest rate rises. But if rates stay higher for longer, additional assistance may be needed to avoid repossessions.
But the political firestorm around rising mortgage rates needs to be put in the wider context of the UK’s broken housing market. The outcry over the many homeowners who face paying more than 20% of their disposable incomes in mortgage repayments will get short shrift if you’re one of the four in 10 renters under the age of 30 who have been paying out more than 30% of your monthly income on rent. Furthermore, many mortgaged homeowners have enjoyed enormous tax-free capital returns on properties bought over the past 15 years, as house prices have increased by around 86% on average since the post-crisis trough of 2008.
Indeed, the lack of political or media outrage at the government’s decision to indefinitely freeze local housing allowance rates in April 2020 stands in marked contrast to the “mortgage timebomb” furore. Since then, as a recent report by the Institute for Fiscal Studies shows, rents for new lets have risen by more than a fifth on average in the UK, in part due to rising interest rates which increase the demand for rental properties. This meant that in the first quarter of 2023 only 5% of private rental properties were affordable for housing benefit recipients, down from 23% in 2020. The same report also found that the quality of both private and socially rented housing had become significantly poorer.
But calls for unfreezing housing benefit have been ignored so far. One risk with raising housing benefit in an unregulated private-renting sector is that it only enables landlords to increase rents. The obvious way to deal with this is to introduce rent controls, which are now being employed in Scotland and have been called for by Sadiq Khan in London. Evidence suggests that rent controls are effective in reducing rents, but can lead to a fall in the supply of private rental accommodation. If more such properties are then sold to first-time buyers this may not be viewed as a problem. But given current affordability problems, what the UK clearly needs is more non-market and good-quality socially rented housing.
Could the mortgage crisis offer an opportunity to reset the market for renters and homeowners? One option for homeowners facing repossession or poverty due to unaffordable mortgages, as proposed in a recent report for the Joseph Rowntree Foundation, would be for the government to support social landlords to buy the homes of mortgaged homeowners, pay off their mortgages and convert the properties to the socially rented sector. The government could fund any negative equity gap and homeowners could continue to live in their properties as social tenants, paying a rent to the government. This would shift the risk caused by the rate rises away from individuals and on to the state – but in return the state would receive an equity stake and flow of rental income, and could expand the supply of affordable housing. A similar approach could be taken by buy-to-let landlords who are in distress and seeking to exit the sector.
The situation also demonstrates the need for a major rethink of the mortgage market in the UK. The UK is unusual in placing such interest rates and credit risks on individual households, being dominated by short-term fixed-rate mortgages of two to five years. In the US, Canada and much of Europe, much longer-term fixed-rate mortgages of 20-25-years are the norm and mortgage insurance is also more common. There is a good case for introducing longer-term fixed-rate mortgages and insurance for first-time buyers with high loan-to-value or loan-to-income ratios, in order to reduce financial risks and avoid the kind of scenario we are seeing play out today.
However, the danger of such a plan is that it would lead to even more mortgage debt flowing into the housing market and would further drive up house prices, as evidence suggests poorly targeted help-to-buy schemes have done. To prevent this, the government needs to correspondingly reduce the investment demand for housing from those people who already own. Existing owners and larger investors enjoy a major advantage in the mortgage market as they can use existing property as collateral for loans, and access larger and cheaper loans with smaller or even zero deposits. This advantage can most easily be removed with property tax reform, with higher taxes on buy-to-let income and second homes. Reforms to make buy-to-let mortgages less attractive would also help.
For most of the 15 years since the great financial crisis, historically low mortgage interest rates have led to a surge of investment into housing, pushing prices ever-higher and disproportionately benefiting anyone lucky enough to have managed to buy a home. Lower-income groups have seen their prospects of home ownership disintegrate while experiencing rapidly rising rents relative to their incomes.
Mortgaged homeowners are facing a bleak few years and solutions are needed. But we can’t lose sight of the fact that renters have been facing the same problem of unaffordable housing costs for too long, and with little relief in sight.
Josh Ryan-Collins is associate professor in economics and finance at the UCL Institute for Innovation and Public Purpose
