Public finances will result in £1000 in annual mortgage payments
As Rishi Sunak warned the Cabinet at its private meeting this week, interest rates are set to rise to 2.5% over the coming year as the Bank of England tries to fight back. against inflation.
As well as threatening to undermine public finances, such a hike would add £1,000 a year to the average buyer’s annual mortgage payments.
Added to soaring energy bills and food prices, the increase in mortgage repayments threatens to weaken the budget of many households.
While low-income households have been offered government assistance with fuel bills, homeowners can expect rather less assistance with mortgage repayments. It’s been two decades since a UK government last offered tax relief to homebuyers on mortgage repayments, and it’s unlikely to be revived now.
Rising interest rates will be a particular shock because we’ve been through so many years of ultra-low rates.
There’s a whole generation of homebuyers who can’t remember a Bank of England base rate of more than one per cent.
When I bought my first home in 1993, I was paying 7.75% – and it sounded like a bargain.
A few years earlier, mortgage rates had reached 15%.
It’s easy for young homebuyers to look at home prices as they were in the 1990s and envy their parents’ generation.
Yet mortgage repayments at that time were a huge burden. If you had just moved up the housing ladder, there were unlikely to be many vacations abroad for a few years.
But I have a lot of sympathy for recent buyers as their refunds skyrocket.
They have been encouraged to enter the market by excessively accommodative monetary policy for far too long.
When the Bank of England cut rates to 0.5% in 2009, they told us it was an emergency measure, to prevent another economic meltdown amid what was then the deepest recession since the 1930s.
The cost of living crisis has caused the prices of energy and food bills to soar
Yet as the economy recovered, rates were kept low.
First, the Bank told us that it would raise rates when unemployment fell to 7%. However, when this threshold was reached, the Bank did not raise rates to more normal levels.
Its policymakers have not taken the threat of inflation seriously – less than a year ago they were still trying to tell us that inflation would peak at 2% this year.
Last month, it reached seven percent.
The result of loose monetary policy has been to create an expectation that interest rates will always be low, thereby encouraging homebuyers and consumers to take on far more debt than is wise.
This, in turn, has helped inflate property prices, making life even harder for the next generation of buyers.
But it’s not just consumers who have been far too complacent about interest rates. The government, too, has been deceived into thinking that it is safe to go into massive debt.
A UK government last balanced the books in 2002-03.
Since then we have had almost two decades in which debt has piled up year on year, to the point that this year the Chancellor had to spend £70billion on the interest bill of the State.
That’s more than the government spends on defense or transportation – and almost as much as it spends on education.
When David Cameron became Prime Minister 12 years ago, his government at least had a plan to reduce the debt and restore balance to the books, but the momentum has waned.
Rising interest rates will soon come as a shock to the public
The Tories appear to have fallen into the trap of Labor taunts over austerity and find it too tempting to hand out taxpayers’ money. Sooner or later, we will have to wean ourselves off constant economic stimulus and start treating debt with caution again.
If it means saving for things rather than buying them on credit, that will be a good thing.
In my grandparents’ time, there were no credit cards. Nor were there any of those apps that encourage people to spend money they don’t have.
There was much more of a culture of thrift – even until people kept banknotes rolled up in a jar and hidden somewhere in their house so they could still afford to pay the bills in hard times. .
The problem is that years of extremely low interest rates have discouraged people from saving and encouraged borrowing.
Saving is a habit we need to rediscover – which will hopefully be a good thing coming out of a very tough year ahead.