Do Britain’s struggling homeowners need a mortgage furlough?

A ghost has taken up residence in the Treasury. It loudly rattles its chain and wails “mortgage furlough, mortgage furlough” every time Jeremy Hunt leaves his office in search of a coffee or a sandwich.

The Resolution Foundation today publishes its updated figures on just how much the mortgage crisis is going to cost Britain’s borrowers. Those figures are truly awful. The average bill for remortgaging comes to £2,900, with the surge in mortgage rates set to rip £15.8bn out of British household budgets. That’s a huge chunk of change coming out of the economy too. It might help tip it into a recession Hunt hopes to avoid.

The reason for the sudden increase is that the City now expects Bank of England base rates to peak at close to six per cent, the highest since the disastrous Liz Truss mini-budget.

This has created a big problem for borrowers because the fixed-rate deals they are mostly on are priced not on base rates but on the market’s expectations for them.

As a result, lenders have withdrawn hundreds of products, while the cost of those remaining on the market is only getting higher. Financial data company Moneyfacts said that the average two-year home loan hit 5.98 per cent on Friday, compared to 5.92 per cent on Thursday. The average five-year deal jumped to 5.62 per cent against 5.56 per cent on Thursday).

Those figures are only going to keep on rising. This is why the ghost has arrived to haunt Hunt.

Liberal Democrat leader Ed Davey picked up its chains and gave them a shake in calling for “emergency help” for borrowers. Others will do the same. And some of them will be sitting on the benches behind the Chancellor. Their postbags will be filled up with letters from constituents facing real trouble.

I’ve spoken to people who will soon find themselves swimming in the deep end of remortgaging waters. A common response? “Just trying not to think about it. Don’t know what I’m going to do.”

Distressed borrowers are constantly told to “talk to your lender” but with a £2,900 annual increase looming, and no obvious way out, what’s a lender going to say? Read our handy leaflet on managing your money? That translates as “you’re on your own kid”. I find it hard to criticise people for sticking their heads in the sand as a result. I might be inclined to do the same.

The situation looks quite different from the last housing crisis in the 1980s, when the market slammed into reverse, people became trapped in negative equity and repossessions boomed.

Mortgages then were typically two or two-and-a-half times the borrower’s income. Now they’re four or five times, with Europe’s highest inflation already taking a bite out of household budgets.

This explains why we are seeing people like Mike Bird, the co-host of The Economist’s Money Talks podcast tweeting things like: “The arc of the universe is long but you just know it bends towards a UK mortgage furlough policy.”

We’ve been here before. Twice, in fact. During lockdown, the government bailed out workers (and their employers) with the first furlough, officially known as the Job Retention Scheme, the biggest component of a wide package of state support for those hit hardest by the pandemic’s economic fallout.

When energy bills then threatened to hit a maximum of £5,000 a year or more, it followed this up with the Energy Bills Support Scheme and then the Energy Price Guarantee, which brought the average down to just over £2,000.

The cost of the furlough scheme, which protected 11.7m jobs, was put at £70bn. The cost of the Energy Price Guarantee is estimated at £27bn, although when it was launched, the government was braced for a much bigger number.

A mortgage bailout or furlough of some kind would be horribly expensive. But not as expensive as either of those two.

However, there are problems with such an idea. First off, such a policy could end up helping a lot of relatively well off borrowers. This is not to underestimate their pain. But there are, at the moment, people literally struggling to eat. Is bailing out a banker’s mortgage really what you want to be doing when her cleaner can’t afford breakfast for his kids? A banker who, moreover, has already benefitted from that energy price guarantee, dubbed a “middle class tax cut” by the Institute of Economic Affairs because its biggest beneficiaries were wealthy homeowners with big houses that consume a lot of energy.

What about a means-tested mortgage bailout? But where do you draw the line? Homes worth £250,000 that are exempt from stamp duty? What about £500,000, which in London won’t get you very far?

What’s more, people in the private rented sector are in just as much of a jam as mortgage holders. Just this week, the estate agent Foxtons released its Lettings Market Index for May. It found that average weekly rent surpassed £600, an eight per cent increase from the previous month and a 13 per cent increase year-on-year.

Mortgage holders’ money goes into the purchase of an asset. Renters’ goes into a void. Renters will cry foul, saying: “hang on, what about us?” Hard to argue with that.

Hunt’s other problems are political. He wants to be seen as a traditional Tory Chancellor, an exponent of sound public finances and sound money after the chaos unleashed by his predecessor Kwasi Kwarteng.

Presiding over a near £16bn bailout is anything but “sound money” at a time when the government’s mortgage rate has climbed substantially too. The national debt has all of a sudden gotten a lot more expensive.

The Chancellor, and his boss Rishi Sunak, are also desperately trying to find the money for a pre-election tax cut. An expensive mortgage furlough scheme would likely knock that idea on the head.

So Hunt will do his damnedest to resist the pressure and hope that the dire predictions for interest rates don’t come true. They might not. Tesco says food price inflation, which has been holding up the expected fall in the Consumer Prices Index, has started to ease. The headline rate of inflation should continue to fall during the summer. So things could look better for Hunt come September, when his autumn statement will be looming.

But if they don’t get better those calls are only going to get louder, MPs postbags will get fuller, and people will anxiously be watching the number of repossessions.

The politics of that situation might very well force the Chancellor into breaking new ground.