Ahead of this week’s shock rate rise, BBC News spoke to dozens of people facing unimaginable rises in mortgage costs. There is no shortage of volunteers who tell their stories.
“My monthly mortgage payments have increased by £270 a month.”
“It’s scary. Petrifying.”
“A few hundred pounds.”
“I don’t sleep well at night. I’m upset. I’m helpless.”
It was the week in which inflation got stuck, the Bank tried to contain it, No. 11 advisers warned of the need to “create a recession” and an inflation blame game broke out, all amid the home mortgage horror.
I was therefore overwhelmed on my visit to a mortgage broker in Brighton, firstly by the response that these increases were indeed possible and contemplated in the ‘Illustration of Key Facts’ required in mortgage applications.
This form illustrates the required payments if interest rates hit a 20-year high. They are currently at a 15-year high. And secondly, broker Ian Carter told me about the almost automatic resort to extending clients’ mortgage terms.
It is now possible, he told me, to extend terms for some customers so that the loan expires when they turn 80. So these are mortgages lasting four decades. Certainly since 2007 the concept of a term of over 30 years, once a rarity affecting less than a fifth of first-time buyers, is now the norm for more than half of buyers.
For someone with a £200,000 mortgage, extending the term from 25 to 33 years could shave around £150 a month off payments. However, the lifetime interest on the loan will increase by £50,000.
Expand and pretend
In commercial markets, this is called “extend and pretend.” Both the government and the opposition are encouraging the banks to offer this as a solution to the current mortgage morass.
This may be one of the factors muting, or at least slowing, the impact of the significant rate hikes seen so far. This adds to the fact that more people are on fixed rates now than during the last significant rate hike cycle in the 1990s. The Bank of England’s Monetary Policy Committee has repeatedly referred to the “full impact” of rate rises not being felt “for some time” for this reason.
A key question is not just why British inflation is more stable than elsewhere, but whether interest rates are heading higher in similar countries as well. After a week of pent-up inflation and a sharp rise in interest rates from both the Bank of England and the mortgage markets, an inflation blame game is emerging for what could be seen as something of a monetary mess.
If markets are correct, UK interest rates are headed for 6-6.25% in early 2024 and will remain there for most of the year, levels not seen since 1998. The bank did not target markets away from such expectations (as they did the last time this happened last fall). Its decisions are “data driven,” it said.
The independence of the Bank of England allows it to take unpopular decisions
It is 25 years since the Bank of England became independent from the government with the right to set interest rates to keep inflation low and stable. For a decade and a half of that period, interest rates were at extremely low levels, close to zero, to support the economy after the 2008 financial crisis, when bank lending all but ground to a halt.
It will always be a challenge to get back to normal levels. The very point of independence is that the Bank of England can afford to be unpopular and make difficult but necessary decisions.
In fact, in the US, the head of the central bank, Jerome Powell, has repeatedly said that one of the points for raising interest rates, and his main example of how it works to help reduce inflation, is a “correction” in the housing market . This helped him communicate his resolve to the financial markets.
Bank of England Governor Andrew Bailey is unlikely to be upset by his Zen approach to criticism, particularly from the raft of pro-Truss newspapers who feel the bank could have moved more quickly to calm markets after the mini-budget.
But this week there has been some public criticism from some in the Cabinet aimed at the bank. In turn, some former officials at the bank have pointed out that the government’s own policy decisions, particularly on trade and labor after Brexit, have contributed to inflationary pressures.
Publicly, however, both the bank and the government were united on the mission and approach to fight inflation. More interestingly, the chancellor, prime minister and governor pointed to the recovery of profit margins from companies that set and maintain high prices. There is some mystery and concern that wholesale price drops are not being passed on to customers. Supermarkets have been named, but there may be more problems further up the supply chain.
The political challenge with this approach is that it encourages supermarkets and others to be less diplomatic about the impact of government policy on prices.
On Thursday, speaking at Times CEO Summit Tesco boss Ken Murphy said “Brexit has definitely had an impact” – with the company facing higher import costs, higher administrative costs and “significantly higher” operating costs in Northern Ireland. Mr Murphy added that Brexit and the pandemic had affected labor supply “with a number of EU nationals leaving the country post-Brexit”.
It is telling that the employees should ask the companies to moderate the price increase. If the economy was functioning competitively and efficiently, this just had to happen as normal.
The blame game can backfire and the number 11 tries to avoid it. But this is happening because the political fallout from the economic pain and the ticking time bomb in the mortgage market will be profound.
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