Labour’s “five-point plan” to ease the pain in the mortgage market can be boiled down to one idea: put pressure on lenders – the banks and building societies – so they can play nice with excess borrowers.
One cannot call this a radical idea, however. First, it is in the interest of the lenders themselves, up to a point, to be flexible by, say, extending the loan term, granting a payment holiday or allowing a borrower to move between arrangement of interest only for a moment. Second, many banks say they already have such policies, although critics say they don’t advertise them with enthusiasm.
In the end, however, the worst outcome for the banks is a crash in the demand for the value of the houses. They also want to avoid a situation where politicians begin to question whether their fabled “affordability checks” on home loans are up to snuff.
And the good news is that lenders will certainly tolerate a round of political arm-twisting that requires a much higher level of patience. One part of the current rate hiking cycle that began in December 2021 is the extremely low level of bad loans and defaults that are showing up.
On the business side of their lending books, banks are not seeing the defaults created by the pandemic that they initially thought. “Strength” is a commonly used word by banks in recent quarterly reports on commercial lending. On the mortgage and consumer side, unemployment has always been the best predictor of defaults: since we now have the lowest level of unemployment since the mid-1970s, the picture is strong there as well.
Meanwhile, net interest margins – the difference between what a bank pays to depositors and what it charges on loans – are rising. So, yes, if forbearance requires banks to absorb some costs, they can do it. Labor is pushing in the right direction, although it admits “some lenders are offering similar measures” to those it proposes and it’s about taking a coherent approach.
The interesting part of the plan, then, is the government’s urge to tell the Financial Conduct Authority, the main financial regulator, to issue formal instructions to lenders that borrowers’ credit scores must unaffected, a point made by campaigner Martin Lewis. Borrowers have the right to request a temporary interest-only arrangement or a longer repayment term; Lenders must wait six months before starting recovery proceedings. The measures will be reviewed after 12 months.
Would an FCA order help, as opposed to the usual regulatory “guidance” on the treatment of customers? Potentially: borrowers can enter a conversation with their lender knowing what to expect. And the six-month non-repossession step may provide a level of comfort, although lenders say the repossession process will take longer.
But let’s not pretend that Labor has somehow discovered a creative way to defuse the “mortgage timebomb”. The ability to delay or streamline payments is only an indirect form of support: the interest and principal must still be paid at the end. Like the prime minister, Rishi Sunak, and chancellor, Jeremy Hunt, Labor seems to have concluded that offering direct support for mortgage holders is not justified.
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Also right: it makes no sense for the government and the Bank of England to be pulling in opposite directions, and direct handouts for home owners will certainly not kick in when renters tend to be poorer. . These are just some of the Trussite Tory MPs (and, ironically, John McDonnell, Labour’s former shadow chancellor) who are flirting with the idea of reintroducing tax relief on mortgage interest.
The Labor leadership, then, is within the consensus that says help for homeowners should take the form of tweaks to mortgage terms. However, this is a smart politics seen to increase the pressure on the banks. Hunt met with their chief executives on Friday. The chancellor will be under more pressure to come up with something meatier than the loose “commitments” that usually emerge from such encounters.
