Labour’s plans to force banks to help struggling borrowers with their mortgages have been slammed as “risky” and “counterproductive”.
The party says lenders should be compelled to help mortgage holders struggling with payments in a bid to avert a looming mortgage crisis as interest rates are expected to keep rising to bring inflation down.
Shadow chancellor Rachel Reeves set out the plan, saying her party would force lenders to permit borrowers to temporarily switch to interest only or lengthen their mortgage term.
Banks would have to allow changes to be reversible on request and to wait at least six months before beginning repossession, while the Financial Conduct Authority (FCA) should not allow borrowers’ credit scores to be affected by support measures, Reeves added.
“Labour will not stand by as millions face a mortgage catastrophe made in Downing Street,” she said.
But the move risks “unintended consequences”, some have warned, while others say interest rate rises leading to “painful” mortgage spikes are required to allow inflation to fall.
Iain Mansfield, research director at think tank Policy Exchange, told City A.M. that direct intervention in financial markets would be “risky and probably counter-productive”.
“Mortgage rate rises are the main mechanism by which the increase in interest rates will bring down inflation,” he said.
“It is painful, but the economy has overheated and keeping inflation higher for longer would be worse. Only supply-side reforms and increasing productivity can get real wages growing again,” he added.
Tom Clougherty, research director at the Centre for Policy Studies said direct intervention of this sort “can still have big unintended consequences”.
“To the extent it forces banks to offer greater cross-subsidies to particular customers, it is bound to raise costs for other borrowers, or prevent necessary adjustments in the mortgage market from taking place,” he said.
“It is much better to leave banks to work things out with borrowers. A legislated, one-size-fits-all approach is bound to cause as many problems as it solves,” he added.
It came as Labour leader Sir Keir Starmer hit out at Rishi Sunak over what he claimed was a “Tory mortgage penalty” during Prime Minister’s Questions in the Commons on Wednesday.
Annual repayments are set to rise by £2,900 for the average household remortgaging next year, according to economists at the Resolution Foundation.
A spokesperson for UK Finance, the country’s top banking lobby, said that “lenders stand ready to help anyone who is worried about their mortgage.”
“We recommend people contact their lender at the earliest opportunity to find out the options available for help… this could be a period of reduced payments, a period of zero payments or a temporary switch to interest-only,” they said. “Contacting your lender to find out the options available won’t impact your credit score, but missing payments will.”