Interest rates surge hits younger borrowers as half a million are struggling to pay

I wonder if they quietly cheer Swati Dhingra and Silvana Tenreyro down at the Financial Conduct Authority?

The pair are external members of the Bank of England’s rate-setting Monetary Policy Committee (MPC) and have been its leading doves on interest rates during the current cycle.

Dhingra earlier this week made a forceful case for holding rates, currently at 4 per cent after 10 straight increases. She blamed the surge in inflation, now at 10.1 per cent, on higher energy and import prices, which are out of the Bank’s control, and described evidence for a potential sustained wage-price spiral as “thin”. So we can guess which way her vote is going at the next MPC meeting.

The City is nonetheless expecting an increase of either 0.25 or 0.5 per cent. Of course, the FCA doesn’t officially have a view on interest rates – but it is one of the organisations having to grapple with the consequences of recent rapid rises.

There were approximately 200,000 mortgage borrowers in payment shortfall in June 2022, which is an unpleasant-looking number. The regulator now says this is expected to more than double, with a further 356,000 mortgage borrowers expected to be struggling to make payments by the end of June 2024, based on current trends and expectations. The increase is lower than feared but nevertheless takes the total to 556,000.

The FCA says it is prepared, following a “mortgage summit” with chancellor Jeremy Hunt and major lenders. It says banks and building societies proactively contacted customers a combined total of 16.5 million times to offer support in the past year, utilising a variety of channels. This is expected to increase to 20.5 million over the next 12 months.

Lenders have improved their performance when it comes to dealing with distressed borrowers, though individual horror stories can still too easily be found and the word “repossession” is poised to re-enter the national conversation.

Their tools range from offering budgeting advice up to “targeted forbearance” – payment holidays and so on. Mortgage terms can sometimes be extended. While that means the borrower ultimately pays more, it is better than losing their home.

Needless to say, it is borrowers aged 18-34 who are most likely to be financially stretched, particularly those living in London and the South East. Those coming off fixed-rate deals face an average increase in their costs of £340 a month, which is clearly unsustainable.

The situation is no better for renters, with rates currently soaring and the CEO of Foxtons telling potential tenants they will have to accept moving further out of London. Supply is woefully insufficient to meet demand, which inevitably drives up prices. Social housing? Good luck with that.

Inflation, the main reason for higher interest rates, imposes a severe burden on everyone, especially those least able to cope with it. Those struggling to feed their families with food prices rising at a 17 per cent clip might be inclined to cheer the MPC’s interest rate hawk-in-chief, Catherine Mann.

Younger Britons are the biggest victims of a financial catch-22 situation, at the core of which is a grotesque policy failure. Young borrowers have been left with Sheldon Mills, who has the unwieldy title of executive director of consumers and competition at the FCA and is leading the watchdog’s attempts to limit the damage.

They have every right to be cross; the pity is that they don’t express as much at the ballot box. Everything from the failure of planning reforms, which might have got more new homes built, to the way the state’s resources are directed has favoured older Britons because they consistently turn up to vote.

However, they may not completely escape the current financial crisis, as the UK economy as a whole will take a hit.