Jeremy Hunt will call on banks to deal with what one Tory Mp called a “mortgage-bomb that is about go off”, yet he ruled in giving fiscal assistance to families struggling to pay for rising mortgage costs.
Hunt said on Tuesday that he wanted to “strangle” the Bank of England and pump more money into an economy, which would further increase the pressure on prices and rates.
The official May inflation rate will be released on Wednesday. According to economists, the headline rate is expected to drop from 8.7% to 8.4%.
It is unlikely that the drop will be enough to prevent the Bank of England from raising interest rates by 0.25 percentage points to 4.75 percent, the highest since 2008. This is because the Bank of England has concerns about the underlying inflationary forces still being too strong.
Hunt rejected on Tuesday calls by Tory MPs for a tax break from Thatcher’s era — called mortgage-interest relief at source — in order to reduce monthly repayments. Gordon Brown, Labour’s chancellor in 2000, abolished the tax benefit.
“We will not do anything to prolong the inflationary pain that people are experiencing,” Hunter said in response to Treasury Questions at the House of Commons.
The chancellor instead will meet with big lenders this Friday to assess the current state of the market and see what extra help they can provide to people who are struggling to make their monthly mortgage payments.
For the first time in December, the cost of an English two-year mortgage fixed at a rate rose over 6 percent on Monday.
Virgin Money became the latest lender on Tuesday to increase the price of its mortgage products, after the financial markets increased their expectations that the BoE would continue to increase interest rates following poor inflation figures.
A senior executive from a major bank said that the move by the chancellor to have talks with lenders was not surprising.
He said that his company offers a variety of ways to help homeowners with their mortgages. However, he added that arrears are not increasing.
Some lenders were less supportive of the decision.
One bank executive said that the chancellor was just playing to the crowd. He added that lenders are already doing everything possible to avoid repossessions. It will allow him to demonstrate that he is doing something.
A December 2022 agreement among banks, regulators, and the Treasury requires lenders to provide tailored assistance to those who are struggling to pay off their mortgages.
Andrew Griffith, City of London Minister, said that lenders could offer mortgage terms extensions or switch to interest only repayment holidays. He added that repossessions are a last resort.
Michael Gove’s suggestion that 25 year fixed-rate mortgages might help ease the housing crisis was met with only lukewarm Treasury approval.
Griffith stated that there are already fixed-rate mortgages with long-term terms on the market, but “consumer demand is the constraining factor”. He said they were not very popular.
In the Conservatives’ election manifesto for 2019, the idea of a lifetime mortgage was suggested. However, Treasury insiders stated that markets had to settle, i.e., interest rates needed to drop significantly from their current level, before it would be likely to become popular.
Richard Donnell said that the cost of financing for 10 or 20 years discouraged borrowers to stop choosing cheap short-term loans and hoping the rates would drop the next time.
He added, “My opinion is that the government must come in and inject this market with fuel to open it.” “I don’t think the market can get there by itself.”
Labour Treasury spokesperson Pat McFadden stated that the UK is still paying for the “giant experiment” Liz Truss conducted last year which forced mortgage rates up.
As they prepare for the general election in 2024, Conservative MPs are also becoming concerned about this problem. Former Tory minister Sir Jake Berry said that “a mortgage-bomb was about to explode”.
Treasury officials are comforted by data that shows home repossessions, and arrears in mortgage payments have fallen below levels before the pandemic.
Rishi Sunak, the Prime Minister of India, has said that his commitment to reduce inflation to around 5.5 percent by 2023 is still on track. He also believes this is the best solution to the mortgage crisis.
Downing Street has said that the government is doing much to assist people in the cost-of-living crisis but it has not indicated any intention to go further than existing plans.