Conservative MPs are increasingly split over whether ministers should intervene to defuse Britain’s mortgage timebomb, as the Bank of England prepares to raise interest rates for a 13th consecutive time.
In a crunch week for the economy, official figures on Wednesday morning are expected to confirm the UK remains stuck with the highest level of inflation in the G7, as the cost of living crisis continues to squeeze household budgets.
Highlighting the challenge facing the central bank to contain the worst hit to living standards on record, City economists predict a modest fall in the annual inflation rate from 8.7% in April to 8.4% for May, as consumers struggle with the soaring cost of food and other essentials.
With pressure mounting on the government to intervene to help mortgage holders, and with the Tories trailing in the polls ahead of key byelections, Jeremy Hunt on Tuesday dismissed calls from Conservative MPs in battleground red wall constituencies demanding urgent support.
Exposing a fresh schism in the party over its economic management, Jake Berry, the influential chair of the the Northern Research Group of Tory MPs, said ministers were at risk of frittering away progress made thanks to support for families with energy costs during the winter.
“People are very concerned about what is being described as the mortgage bomb about to go off,” he told the chancellor from the backbenches in the Commons. “If we don’t help families now, all the other money that we have spent to help them will have been wasted if they lose their home.”
Convulsions in financial markets in the past week have driven up the average cost of a two-year fixed rate mortgage above 6% for the first time since the ill-fated Liz Truss premiership, as Britain’s biggest lenders – including Nationwide, NatWest and HSBC – scramble to pull hundreds of cheaper deals.
Should borrowing costs be sustained at that level for several years, house prices across the UK could collapse by a quarter, with no recovery until 2025, economists at the consultancy Capital Economics have warned.
Borrowers are experiencing the sharpest increase in interest payments since the late 1980s, with the Bank of England imposing 12 consecutive increases in its key base rate dating back to December 2021.
Financial markets widely expect Threadneedle Street will be forced to hike it again on Thursday to tackle stubbornly high inflation. City traders are betting on an increase of at least a quarter-point from the current level of 4.5%, with the possibility of further increases taking the rate close to 6% by Christmas.
Hunt has summoned banking chiefs for a meeting at the Treasury on Friday to discuss options for responding to the mortgage crisis.
Divisions on the Conservative benches emerged during a debate in the House of Commons on Tuesday. Fuelling political unrest at the prospect of millions of households facing a sharp increase in borrowing costs, Berry urged ministers to reinstate a “bold Conservative idea” of offering tax relief on mortgage interest.
Known as mortgage relief at source, or Miras, the tax break was first launched in the 1980s under Margaret Thatcher to encourage home ownership, but was scrapped by Gordon Brown in 2000 amid criticism it had become a giveaway for the rich.
Berry’s call to revive the tax break was echoed by Jonathan Gullis, the outspoken Tory MP for Stoke-on-Trent North. But the Treasury minister, Andrew Griffith, suggested such a tax break could be “disastrous” for the government finances.
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“This government wouldn’t come forward with the sort of unfunded spending commitments that we see on the benches opposite,” he said. “That would be disastrous … because it would see inflation higher for longer.”
The chancellor has so far ruled out mortgage support, and did so again during Tuesday’s debate. He argued it would undermine the Bank of England’s efforts to curb inflation, and insisted the government had already provided substantial sums to help families with rising living costs. “Those kind of schemes, which involve injecting large amounts of cash into the economy right now, would be inflationary,” he added.
Figures on Sunak’s right flank appear increasingly ready to criticise the prime minister’s managerialist approach to economic policy, demanding he instead offer voters tax cuts, deregulation and a warmer embrace of Brexit.
Labour on Wednesday sought to capitalise on public anger over soaring mortgage costs by labelling them a “Tory mortgage penalty”, while highlighting sharp increases facing voters in byelections triggered after Boris Johnson’s resignation.
Rachel Reeves, the shadow chancellor, told the Commons that more than 10,000 households in Johnson’s former seat of Uxbridge and South Ruislip would need to pay an extra £5,200 a year on average on their mortgages. In Selby and Ainsty, vacated amid increasingly open Tory infighting by Nigel Adams, an ally of the former prime minister, Labour said more than 12,000 households would face an extra £2,700 on average for their home loans.
“While the Tories squabble over peerages and parties, mortgage products are being withdrawn by lenders and replaced by mortgages with much higher rates,” Reeves said. “This is the consequence of the Conservative government’s mini-budget and 13 years of economic failure, with inflation higher here than in similar countries.”
More than a quarter of UK homeowners on a fixed-rate mortgage are expected to reach the end of cheaper deals before the next general election, which must be held by 28 January 2025, with the Resolution Foundation thinktank estimating a £2,900 increase in annual repayments for the average household.
