‘It would be insane’: Why mortgage support schemes are the worst idea
Melissa Lawford
6 min read
Mortgages
Homeowners are facing a brutal blow as mortgage costs spiral – yet anyone hoping Jeremy Hunt will ride to the rescue as the Government did during the pandemic is in for a nasty shock.
Despite cries for intervention to soften the blow as millions come to remortgage, economists say state help for families on housing costs would undermine the Government’s aim to cut inflation.
“It would be insane,” says Simon French, managing director at Panmure Gordon and a former Cabinet advisor.
“I can’t be much clearer than that. It is the shortest answer you will ever get from an economist.”
Still, Rishi Sunak and Jeremy Hunt are under pressure to act as mortgage rates spiral higher day-by-day.
The average two-year fixed rate mortgage crossed 6pc on Monday – exactly triple the average rate of a borrower whose fixed rate is now expiring.
7.5 million mortgage holders will have moved onto radically higher rates by the end of 2026, according to the Resolution Foundation. The average increase in payments for those remortgaging next will be nearly £3,000.
The Government has set a precedent for large scale intervention. From the 1970s through the 1990s, borrowers benefited from a tax break in the form of mortgage interest relief at source (Miras).
During the pandemic, the Government pushed lenders to grant mortgage repayment holidays to protect struggling homeowners.
During the energy crisis, it demonstrated it was willing to spend billions to protect people’s living standards when it capped the nation’s energy bills and paid the difference.
Yet Prime Minister Rishi Sunak has ruled out cash support for mortgage holders for now.
Economists warn any direct support would create a vicious cycle by driving inflation up and forcing interest rates even higher.
“I think it would be completely wrong for the government to intervene in the mortgage market,” says Tom Clougherty, head of tax at the Centre for Policy Studies think tank. “If they really intervened, it would sound the death knell for this era of Conservatism.”
A major part of the reason why high interest rates are a mechanism to bring down inflation is because they squeeze borrowers’ incomes. In turn, this takes cash out of the economy, reducing demand.
If the Government were to reduce homeowners’ mortgage bills, it would negate this impact. People would have the same amount of money to spend as they do today, helping to drive prices higher.
“That is econ 101. That pushes up prices,” says French.
Iain Mansfield, director of research at Policy Exchange and a former government advisor, says: “A massive spending bonanza like this would directly harm the economy.
“If you subsidise mortgages, you weaken that mechanism, which would mean interest rates would have to stay higher for longer. It would be phenomenally expensive.”
Crucially, it would be a major blow to the Bank of England’s credibility, says Althea Spinozzi, senior fixed income strategist at Saxo Bank.
“It would push the Bank of England to be even more aggressive. The Bank of England would have to induce a shock into markets,” says Spinozzi.
The repercussions would be felt across the financial system. “We might see more of what happened last September, which led to the pension funds crisis,” says Spinozzi.
There is also a question of fairness.
Tim Pitt, policy fellow at Onward and a former special adviser to two Conservative chancellors, says: “Ultimately, what you’d be doing is asking people who are less well off who don’t own their own home to subsidise those who are better off and are on the housing ladder, during a cost of living crisis.
As French puts it: “Why should the state or the general taxpayer basically fund the income stream of, or the servicing costs for, a private asset?”
Aside from the question of whether it is right or wrong, there are also major question marks over whether support for mortgage payments is even feasible.
Support would require more Government borrowing, which would run the risk of another surge in borrowing costs if investors do not view the plans as credible. The threat of repeating the bond nightmare suffered by predecessor Kwasi Kwarteng may well be enough to put Hunt off trying.
“Markets look at the quality of public spending as much as the quantity,” says French. “Does it look like an efficient, productive use of public funds? No, I don’t think it does.”
If markets rejected the policy, it would prove self-defeating: any rise in government borrowing costs would soon translate into higher mortgage rates for homeowners.
Raising the money would also add to public debt and reduce the Chancellor’s room for manoeuvre within his fiscal rules, which include getting debt falling as a ratio of GDP. This would raise the risk of further tax rises, says Mansfield.
The policy would also be worse for the broader economy. If the Bank is forced to increase short-term rates more aggressively to contain inflation, more companies with large debt piles would be pushed into insolvency.
“Companies that are depending on this will burst,” says Spinozzi.
More insolvencies would mean higher unemployment rates, which in turn would mean more home repossessions. The support that homeowners receive to help them cover their payments could mean they end up losing their jobs and have to sell up anyway.
Mortgage repayment holidays, akin to those introduced during the pandemic, would avoid the need for public borrowing.
However, this would still be in conflict with the Bank of England’s efforts to bring down inflation and would therefore still be problematic, says French.
There are other policy levers that the Government is more likely to pull. One option is to put pressure on banks to be more lenient with homeowners who are struggling to make their mortgage payments, says Pitt.
This would avert repossessions while also avoiding stoking inflation, as homeowners in this position simply do not have the money to spend.
“That is the most direct thing they could do,” says Pitt.
The Government could also accelerate the childcare reforms announced in March’s Budget. Currently, parents are to be offered 30-hours free childcare a week for children aged nine-months and over from September 2025.
Bringing this forward would help ease pressure on household budgets while also ensuring people are not spending excess money on inflationary items such as goods and services.
Ultimately, however, these more feasible interventions are likely to be marginal compared to the kind of widespread support that many are now calling for.
Unfortunately, the reality is millions of homeowners will be left to bear the weight of higher mortgage costs as the price to pay for containing inflation.
