'That Would Be Crazy': Why Mortgage Support Schemes Are the Worst Idea

Homeowners are facing a brutal blow from skyrocketing mortgage costs, but everyone is hoping Jeremy Hunt will come to the rescue as it's a nasty shock the government has done during the pandemic.

Despite calls for intervention to cushion the blow as millions re-mortgage, economists say public assistance to families to cover housing costs will undermine the government's goal of reduce inflation.< /p>

“That would be crazy,” says Simon French, Managing Director of Panmure Gordon and former Cabinet Advisor.

“I can't put it more clearly. That's the shortest answer you'll ever get from an economist.»

Nevertheless, Rishi Sunak and Jeremy Hunt are forced to act as mortgage rates rise by the day.

>The average two-year fixed-rate mortgage topped 6% on Monday, exactly three times the average rate of a borrower whose fixed-rate is expiring.

7.5 million mortgage holders will move to radically higher rates by the end of 2026, according to the Resolution Foundation. The average increase in payments for those who remortgage next will be almost £3,000.

This surge will hurt many financially and bankrupt some overnight. Conservative MP Lucy Allan warned Britain was facing a mortgage 'catastrophe'.

The government has set a precedent for large-scale intervention. From the 1970s to the 1990s, borrowers enjoyed tax breaks in the form of reduced interest on at-source mortgages (Miras).

Big jump in borrowers in 2006

During the pandemic, the government pushed lenders to provide repayment holidays mortgage loans. to protect homeowners in distress.

During the energy crisis, the company showed it was willing to spend billions to protect people's living standards when it capped the country's electricity bill and paid the difference.

Prime Minister Rishi Sunak, however, ruled out bailouts for mortgage holders. for now.

Economists warn that any direct support will create a vicious circle, fueling inflation and raising interest rates further.

“I think it would be completely wrong for the government to interfere in the mortgage market,” says Tom Clougherty, head of the tax department at the Center for Policy Research think tank. «If they did intervene, it would sound the death knell for this era of conservatism.»

Hunt's hands are tied because subsidizing mortgage holders directly would undermine the Bank of England's efforts to bring down inflation.

< p>The main reason why high interest rates are a mechanism to reduce inflation is that they reduce the income of borrowers. In turn, this deprives the economy of cash, reducing demand.

If the government were to reduce homeowners' mortgage bills, it would negate that impact. People will have the same amount of money they can spend as they do today, which will help push prices up.

«That's saving 101. That's pushing prices up,» says French.

Skyrocketing growth spending in 2006.

Ian Mansfield, director of research at Policy Exchange and a former government adviser, says: «Such massive spending will directly hurt the economy.

«If you subsidize mortgages, you weaken this mechanism. , which would mean that interest rates should remain higher for longer. It would be phenomenally expensive.» England, says Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank.

«This will push the Bank of England to be even more aggressive. The Bank of England will have to shock the markets,» says Spinozzi.

There is also the question of fairness.

Tim Pitt, political An Onward staffer and former special adviser to two Conservative chancellors, says: “Ultimately, you would ask the less wealthy people who don't own a home to subsidize the richer ones. and are on the housing ladder during a cost of living crisis.

As French put it: “Why should the government or the ordinary taxpayer fund the revenue stream or maintenance costs of a private asset in the main?”

In addition to the question of whether this is the right thing to do or not, there are also serious questions about whether whether support for mortgage payments at all.

Support will require additional government borrowing, fraught with the risk of another surge in borrowing costs if investors do not see these plans as credible. The threat of a repeat of the communications nightmare experienced by Kwasi Kwarteng's predecessor may well be enough to make Hunt give up trying.

«Markets focus less on the quality of public spending than on the quantity,» says French. “Does this sound like an efficient, productive use of public funds? No, I don't think so.»

If the markets were to reject this policy, it would be doomed to failure: any increase in the cost of government borrowing would soon lead to higher mortgage rates for homeowners.

maneuver within its fiscal rules, which include debt reduction relative to GDP. That would increase the risk of further tax increases, Mansfield said.

Government borrowing in 2006.

This policy will also be worse for the economy as a whole. If the Bank is forced to raise short-term rates more aggressively to curb inflation, more heavily indebted companies will go bankrupt.

“Companies that depend on it will burst,” Spinozzi says.

More bankruptcies would mean higher unemployment, which in turn would mean more home foreclosures. The support homeowners receive to help them cover their payments could mean they end up losing their jobs and being forced to sell the property anyway.

Mortgage holidays, like those introduced during the pandemic, will avoid the need for government loans.

However, this will still run counter to the Bank of England's efforts to bring down inflation and therefore be problematic, French says.

There are other policy levers the government is likely to use . One option, Pitt said, is to pressure banks to be more lenient with homeowners who are struggling to make their mortgage payments.

This will prevent forfeiture and also avoid fueling inflation, as homeowners in this position simply do. they don't have money to spend.

«That's the most direct thing they could do,» says Pitt.

The government could also speed up childcare reforms, announced in the March budget. Currently, from September 2025, parents will be offered 30 hours of free childcare per week for children nine months of age and older.

This will help ease the strain on family budgets, as well as ensure that people do not spend money. excess money for inflationary goods such as goods and services.

However, in the long run, these more feasible interventions are likely to be small compared to the broad support that many are now calling for.

< p>Unfortunately, the reality is that millions of homeowners will have to bear the brunt of higher mortgage costs as the price of curbing inflation.