Lord Willetts is President of the Resolution Foundation. He is a former Minister for Universities and Science.
The figures for mortgage payments released by Resolution Foundation over the weekend were very striking. We looked at total rises in mortgage payments over the five years from December 2021, when rates started rising, to the end of 2026.
Our researcher Simon Pittaway calculates that this increase adds up to £15.8 billion. Mortgage payments have gone up by £6.3 billion so far with another £9.5 billion still to come. Of that, £5 billion of increased payments are due in 2024. That includes about 800,000 households due to come off five year fixes secured in 2019 when five year rates were very low. And there was another surge in two year fixes in 2022, when rates were rising but were relatively low for most of the year. And now the market expectation is that rates will peak around next summer as well. This is not a great back-drop for Conservatives fighting a general election.
So there is a lot of mortgage pain to come. Who will feel this most acutely?
There are fewer home-owners with mortgages: more young people are stuck in the private rented sector and also more old people own their home with the mortgage paid off. So the mortgage crunch hits a narrower group of mortgaged home owners than in the past. But if you need to use interest rates to slow down the economy, you need to lower private spending and so one view might be that if they act on a smaller base then the pressure needs there needs to be even greater.
Mortgages are now more concentrated amongst the relatively prosperous – the more affluent 40 per cent of the population will pay 75 per cent of the increase in mortgage payments. So perhaps they may not find the increased burden quite so bad. But it is younger home owners who are proportionately most exposed to the costs of higher mortgages in relation to their incomes and the value of their houses.
What can be done? There are four policy options.
First, just create a new spending programme to bail-out people facing higher mortgage payments. But this would not be a good use of public spending, especially given the incomes of many of the people affected. Moreover – although it sounds very harsh to put it like this – mortgage rates have gone up as part of a deliberate policy of raising interest rates to bring down inflation. Protecting people from the implementation of the policy rather misses the point.
Secondly, there are smart ways in which lenders could exercise discretion to soften the pain. The most obvious measure is to extend the life of the loan. This can particularly help younger borrowers – it is harder to make that adjustment for older people.
There are other options which may not help with the pain today but show something can be done about it for the future. The Government could engage with two further options to show it is not entirely passive when families face these pressures.
So one further idea would be to promote a move to longer-term fixed rate mortgages. Britain is unusual in the high proportion of our mortgages with variable interest rates. But getting there is hard. If it is just done on commercial terms, then long-term fixed rates can be very expensive indeed, though these could be excluded from the cap on the proportion of mortgages issued at 4.5 times income – there’s no rationale for it where a household isn’t facing interest rate risk. Lenders fear being done for mis-selling if they sell and long term interest rates subsequently fall. Regulators would need to provide strong reassurance on this for the market to take off.
America tends to have many more mortgages fixed for the long-term. However America makes it affordable by effectively using federal agencies such as Fannie Mae and Fannie May to buy commercial loans and hold them as assets. This means that the Federal Government can subsidise the rates or protect borrowers by, for example, special forbearance on loans made during the Covid crisis. But there is an implicit Government guarantee behind them which could be very hazardous.
There is a fourth option which is to operate a compulsory mortgage insurance scheme. It puts up the cost of a mortgage because it is added on to the payments due for it. But it can increase access to loans which are high relative to the value of the house, and this tends to help younger people getting started on the housing ladder. Ian Mulheirn advocates this option as the best way of broadening access to mortgages and at the same time easing the risks facing lenders.
The Government cannot offer blanket protection from the increase in interest rates. However, one reason the pain is so acute is that it is being born by a narrower group of mortgage borrowers since there are fewer of them. Many young buyers have been driven out. During the 1990s, first-time buyers used typically to make a five per cent deposit but now it’s usually around 15 percrnt and on much higher house prices.
So the Bank is having to hit a narrow group very hard to get an impact from raising interest rates. Broadening access to mortgages would mean that the Bank could get the same shrinkage of personal balance sheets without raising rates so high. This would reduce the pain on individual households by sharing it more equally.