UK has little wiggle room on mortgage aid

Average homeowner who renegotiates their mortgage in 2024 to pay extra 2,900 pounds a year

LONDON (Reuters Breakingviews) – UK Prime Minister Rishi Sunak is under pressure to provide relief for mortgage borrowers buckling under soaring interest rates. Stubbornly high inflation, tight public finances and jittery investors will force him to tread carefully. The risk is that he does too little to solve the home loans emergency – and his own government’s popularity crisis.

Rising prices and borrowing costs have left Britain’s 1.7 trillion pound mortgage market in a bind. Rates on the average five-year fixed-rate housing loan are around 5.67 per cent. That’s the highest level since they topped 6pc after the infamous “mini-budget” that led to the departure of Sunak’s predecessor Liz Truss.

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Some 800,000 borrowers still need to refinance their loans this year, followed by a further 1.6 million homeowners next year, according to UK Finance. The Resolution Foundation estimates the average homeowner who renegotiates their mortgage in 2024 will have to pay an extra 2,900 pounds a year.

With an election due by January 2025 – and polls showing his Conservatives trailing the opposition Labour Party by 16 percentage points – Sunak cannot afford to do nothing. But neither can he afford to offer state aid to homeowners. That’s because the public finances are stretched and investors are monitoring Britain’s debt levels following the disastrous “Trussonomics” experiment.

The government may therefore lean on banks instead. Finance minister Jeremy Hunt said on Tuesday he would talk to lenders. Official pressure could persuade banks to offer payment holidays for the less wealthy, as banks have done in Spain, or allow borrowers to fix rates at low levels for part of the loan, as in Poland. That would crimp banks’ profit margins but could prevent a wave of forced selling or repossessions.

The problem is that mortgage relief dilutes the Bank of England’s fight against inflation, which remained stubbornly high at 8.7pc in May. Higher borrowing costs are the central bank’s main tool for crimping demand. Government interference in mortgage lending could force the BoE to even more aggressively raise rates, already at the highest level since 2008.

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Not everyone is affected by the squeeze. The share of UK households with a mortgage has fallen below 30%, from nearly 40pc in 1989, because more older people own their homes outright while younger people rent. Yet the ruling Conservative Party has spent years promoting home ownership. Sunak’s chances of remaining at his current address after the election hinge on his ability to ensure that millions of Britons can stay at theirs.