As rising interest rates put a squeeze on millions of mortgage borrowers there have been calls for the government to intervene. But what could it do to help cash-strapped households?
Improve help with monthly payments
There is government help for those who are really struggling, called support for mortgage interest (SMI). This is available to people who are getting one of a list of other benefits including universal credit and income support. It is not available as soon as you go on benefits and is not a payout but a loan – when you eventually sell your house you will have to repay it. You might also need to repay it if you go bankrupt or enter an insolvency plan. The government could change the terms of this help – it could be available more quickly, or to a wider group of people. Nevertheless, it will probably remain targeted at only the very worst off.
Reintroduce tax relief on mortgage payments
More than 25,000 people have signed a petition calling on the government to let people make mortgage repayments from their salary before it is taxed – a move that could reduce some of the pain by reducing wages taxes. This would not be unprecedented – throughout the 80s and 90s borrowers could claim mortgage interest relief at source (Miras), which gave them tax relief on their interest payments. But the government has already ruled out its reintroduction, saying it does not believe it to be the most effective way to target support to those who need it most. “The tax relief would be of greater benefit to those paying higher rates of tax with the most expensive properties and would only benefit those in employment,” it says.
Ease rules on interest-only mortgages
Borrowers could cut their monthly costs by switching from a repayment mortgage, which includes paying off the some of the original loan each month, to an interest-only loan. The government and regulators could make this an easy option by scrapping rules which mean that borrowers have to show how they will repay the mortgage at the end of the term. They are unlikely to do this across the board: the rules were brought in after the financial crash to stop people taking on mortgages they could not afford to repay and are considered to have prevented reckless lending. However, regulators have been allowing some borrowers to switch to interest-only without a repayment plan and this is likely to continue to be a strategy (see below).
Continue insisting lenders help borrowers
In December the government told lenders they must do everything they can to support borrowers, including letting them move to interest-only payments temporarily if necessary or switch to a new rate without an affordability check as long as they are up-to-date on repayments. After the 2008 banking crash and during the Covid crisis, lenders exercised this kind of forbearance and repossession rates were kept down as a result. “It is likely the government and regulators will continue with having underlying forbearance measures and encouraging lenders to take an individual approach to borrowers,” says David Hollingworth of brokers L&C Mortgages.
Target certain groups
The government could target the borrowers most at risk of falling into arrears, says Neal Hudson, a housing market analyst at consultancy BuiltPlace. He suggests these might include those in shared ownership properties who have rising rents to pay alongside their mortgage, those with Help to Buy equity loans who face interest payments on that debt alongside their home loan (currently set at 1.75% in the fifth year and rising each year), and those caught up in the cladding scandal and facing high service charges. In these cases it might not be the mortgage payments that are reduced but the other costs on top could be capped. Many housing associations have agreed to cap shared ownership rent rises at 7%, but the government could choose to make this compulsory and even lower it.
Introduce a mortgage protection fund
Sir Ed Davey, leader of the Liberal Democrats, has revived his call for a £3bn emergency mortgage protection fund, which he first called for in the aftermath of Liz Truss’s disastrous mini-budget. The fund would allow homeowners whose mortgage payments have risen by more than 10% of their income to apply for a £300-a-month grant. “If we don’t give that sort of help to those people, you’d see a spiral down and it will hit the whole economy,” Davey said on Friday. Opponents argue that such a scheme would unfairly help wealthier people who can afford to own a home, to the detriment of tax paying renters.
Order the Bank of England to hold rates
For more than two decades the Bank has been independent of the government – one of Gordon Brown’s first acts as chancellor was to set it free, and since then it has been responsible for setting interest rates. To step in and force its hand would be a big intervention, and is probably the least likely action the government will take at this point.