Why Britons are facing a mortgage time bomb

In the autumn of 2019, Britain felt like a ­tumultuous place. Boris Johnson had just secured his position as prime minister amid protracted Brexit negotiations that cost Theresa May her job while the economy was flatlining, under pressure from weak consumer confidence and a global economic slowdown.

Yet amid the uncertainty, one thing seemed a given — that the cost of ­borrowing would remain at rock bottom.

That view was cemented by lenders falling over themselves to offer deals that had never been seen before. ­Anyone with a good credit rating and a decent amount of equity in their home could secure a mortgage at less than 1 per cent and fix it for two, three or five years.

Many took the opportunity, although with no sense of urgency because it felt like rates would stay low for ever. No wonder when the Bank of England base rate had not been above 0.75 per cent in nearly ten years and ­inflation was well below the official 2 per cent target.

However, the pandemic struck and the era of cheap money was over.

As the Bank of England chose this week to leave the official cost of borrowing at a 16-year high of 5.25 per cent, the financial pain for millions of homeowners has been significant.

About three million mortgages fixed when rates were at historic lows have already come to an end since 2021, with many homeowners seeing their interest rates quadruple.

The Resolution Foundation think tank estimates that home loan payments will rise by nearly £16 billion a year by 2026, increasing the average monthly cost by about £250, which is the equivalent of a 10 per cent cut in household disposable income.

Borrowers coming to the end of deals following Liz Truss’s mini-budget in 2022 have suffered some of the biggest leaps in repayments.

Her unfunded tax cuts spooked the markets, sending borrowing costs soaring — the average two-year fix rose from 3.66 per cent in September to nearly 6 per cent in November.

However, the former Tory leader has been largely unrepentant. Perhaps she has not had to worry about repayments having earned about £250,000 in speaking fees since leaving office.

While there have been some ups and downs in mortgage rates since the mini-budget, borrowers coming to the end of cheap fixes this month are still little better off, with the average two-year deal now 5.94 per cent, according to Moneyfacts.

Indeed, rates have actually been inching higher in recent weeks with Nationwide, Santander and NatWest increasing the cost of new deals as uncertainty remains over the state of the economy and the threat of inflation.

One borrower paying a higher rate is Tom Arnall, a 36-year-old financial headhunter from Holland Park, west London. Repayments on his one-bedroom flat have just gone up by nearly £400 a month to £1,300 after his rate jumped from 2 per cent to 5.51 per cent.

“It is quite a wallop,” he said. “I will manage. I’m lucky to have a decent bit of disposable income but I’m definitely far more conscious about the way I spend money.”

He added: “I know people who have got kids and who earn six-figure salaries who are really struggling right now. On paper those people should be rich but after the cost of nursery and then their mortgage they haven’t got too much.”

A further 1.4 million borrowers will soon experience a similar financial shock to Arnall as their cheap fixes end this year.

With 175,000 extra homeowners having to cut back their spending each month before a general election this year, Rishi Sunak is facing an almost ­intractable political headache.

The prime minister may not have been in government during the mini-budget, but voters blame the Tories for higher mortgage rates and Labour is taking every opportunity to remind people of the Tories’ economic record.

Arnall — arguably, on paper, a natural Conservative voter — is one of the many who blame the government, ­although he also thinks the Bank of ­England’s role should be examined.

He said: “There’s a number of macro factors [but] the government hasn’t helped and obviously the Liz Truss mini-budget was the nail in the coffin. But a lot of people I speak to who are better ­informed think the Bank of ­England has really mismanaged the ­situation around inflation and interest rates.”

So is there any light at the end of the ­tunnel for beleaguered mortgage holders and therefore Sunak’s premiership?

Views among economists are, as ever, mixed, although few doubt the Bank of England will cut the cost of ­borrowing this year. The main question is when and how many times.

Until recently the markets had been predicting as many as six rate cuts this year. However, higher-than-expected inflation figures in America over the past couple of months have changed sentiment, with most economists now expecting the Bank of England to cut rates only twice this year, with the first reduction coming in June or August.

Andrew Bailey, the governor of the Bank, offered a more optimistic picture this week, chiding markets for reading too much into American data.

He said he was “somewhat puzzled” that market interest rates, including mortgage rates, had started to rise, pointing out that “the dynamics of ­inflation in this country are different to the US”.

He indicated there could be more cuts than expected over the next year or so because inflation had fallen more than expected. He added that he believed the economy had “turned a corner” but noted that recovery was not particularly strong.

Jeremy Hunt, the chancellor, also weighed into the debate, saying he would “much rather” the Bank waited until “they are absolutely sure inflation is on a downward trajectory than rush into a decision that they had to reverse at a later stage”.

To a certain extent, the words of both Hunt and Bailey are irrelevant because the path of interest rates is likely to be determined by the economic data that emerges over the coming months.

There will be two more sets of inflation numbers released before the Bank’s next decision on rates in June and if these come in higher than ­expected, an imminent cut seems ­unlikely. However, if they surprise on the downside, everything may change.

The strength of the economic ­recovery and wage growth are the other factors that rate setters on the Monetary Policy Committee will be looking at closely before deciding. If ­either of these prove stronger than ­expected, rate cuts could be delayed.

Anyone hoping for a rate cut soon may yet be disappointed. On Friday the ONS reported that the economy grew by 0.6 per cent in the first three months of the year, which was higher than the 0.4 per cent figure widely expected.

While this data may be ­encouraging for Sunak, and supports his claims that his economic plan is working, it is likely to be of little ­electoral use if it delays interest rate cuts.

Whatever happens with rates, one bright spot as the cost of borrowing has soared in recent years has been how few people have lost their homes or changed tack to afford their mortgage. So far arrears have risen to 1.11 per cent, far below levels in the early 1990s and after the 2008 financial crisis.

One high street bank’s head of ­mortgages said: “We’re not seeing ­customers struggling immediately, we’re not seeing many people switching their loans to interest-only or extending their mortgage terms, over 95 per cent of customers are swallowing it.

“While obviously you have to wait as it can take a little bit of time, there’s no real sign [of distress] at the moment. If unemployment stays where it is, most customers will be able to pay their mortgages.”

Whether homeowners will think that just getting by is enough to lend their vote to the Tories once more, ­remains to be seen.

Bank of England in political crosshairs

In the past year the former prime minister Liz Truss has called for Andrew Bailey, the governor of the Bank of England, to be sacked and accused it of bringing down her 49-day premiership as part of the deep economic state (Mehreen Khan writes).

The Bank’s leadership survived her onslaught, but is now facing an altogether trickier challenge from the Tories: how to ward off pressure to cut interest rates in an election year?

“Let me be clear: when we are sitting in the room [deciding interest rates] we never discuss politics,” Bailey told journalists after the monetary policy committee decided this week to keep the base rate at 5.25 per cent.

The governor admitted that he “hears” the clamour for rate cuts emanating from Westminster, but “our job is to take decisions consistent with our [inflation] remit… so [politics] isn’t a consideration”.

The central bank’s independence, formally won from the Treasury days after Gordon Brown was made chancellor in 1997, is a prized part of the Britain’s economic governance. Independence is widely credited with having helped to keep inflation broadly low and stable for most of the past 26 years, as borrowing costs could no longer be manipulated by chancellors before elections.

But raging price growth since late 2021 has thrust the Bank back into the political limelight, with critics in the House of Lords and the Commons Treasury select committee accusing Bailey and his colleagues of being asleep at the wheel on inflation.

The Bank’s independence has been undermined in a more subtle way by Rishi Sunak’s decision to set an inflation “target” to halve price growth over the course of 2023. Managing inflation is the sole job of the Bank, often having to do more or less inflation-busting depending on decisions taken by the government. It was no coincidence that in November 2022 Truss’s £50 billion mini-budget tax blitz forced the Bank into its largest single interest rate rise since 1989.

Sunak’s inflation target has been criticised for blurring the lines between fiscal and monetary policy. Those lines are now due to be tested again as the Bank’s rate-cutting cycle is likely to coincide with a general election year for the first time since 2001.

Rather than ratchet up demands for rate cuts, Jeremy Hunt, the chancellor, warned on Thursday against monetary loosening until Bailey and his colleagues were “absolutely sure that inflation is on a downward trajectory” and for the Bank not to “rush into a decision that they have to reverse at a later stage”.

His tone could shift within weeks when data is likely to show that inflation hit the Bank’s 2 per cent target last month, for the first time since the summer of 2021.