Preventing repossession: Revisiting mortgage safety nets in the current crisis

In an effort to tackle inflation, the Bank of England has raised interest rates for the 13th  time in a row. The base rate is now at 5% – its highest level since 2008. This has led to a surge in mortgage rates, making it more costly for homeowners to repay their loans.

At the same time, the cost of living crisis has imposed a significant strain on household budgets. Diminished spending power already makes it difficult for homeowners to meet their mortgage payments, increasing the likelihood of falling into financial distress.

Together, these circumstances create a perfect storm in which some mortgage holders are at risk of default. This could lead to additional loans, fees, and charges; poor credit scores; or, in the worst case, repossession.

Hiked rates will have a significant impact on mortgage holders

Commentators predict the crisis will have a significant impact on the financial stability of homeowners. Analysis carried out by Public First for The Observer estimates that some households could see their home repayments rise by £5,000 or more per year as a result of the jump in interest rates. The Institute of Fiscal Studies has said the increase in mortgage payments could see 1.4 million people lose over 20% of their disposable income. According to the National Institute of Economic and Social Research, the rise in rates will exhaust the savings of 1.2 million households.

Meanwhile, the Mayor of London Sadiq Khan has warned that homeowners face “a wave of repossessions”. Research by academics at Stanford University has found that loss of home is associated with housing instability; reduced future rates of homeownership; higher rates of financial distress; and, for some, increased likelihood of divorce and of moving to neighbourhoods with lower average incomes and school test scores. With these costs in mind, there is a strong case for having robust government-backed mortgage safety nets to help protect households at risk of losing their home.

The Government has intervened in the crisis

To combat the current crisis, in June 2023 the Chancellor announced he had worked with lenders to introduce a range of support measures for mortgage holders, including tailored support and advice for customers and options for them to temporarily switch to a different mortgage arrangement. Perhaps most importantly, he also announced a moratorium on home repossession within 12 months of the first missed payment.

Many households will be grateful for this added protection. While the interventions are indeed welcome (consumer champion Martin Lewis has said he is pleased with the Chancellor’s decision), a 12-month moratorium raises concerns around ‘kicking the can down the road’. When the suspension eventually comes to an end, repossessions could start to increase in significant numbers – there is a risk of creating a cliff edge over which homeowners are pushed next year.

Other politicians have floated other mortgage solutions in recent weeks. In the aftermath of Liz Truss’ doomed mini-budget, Liberal Democrat leader, Sir Ed Davey, proposed giving £300 cash to struggling homeowners. But that ‘mortgage protection fund’ – proposed for a second time during current events – while no doubt helpful, is only a small, temporary response. In the words of the Intermediary Mortgage Lenders Association, there are more targeted, effective measures than setting up a government-mandated fund.

Conservative MP Sir Jake Berry has also weighed in. He has asked the Chancellor to reintroduce a mortgage interest relief at source (Miras) scheme, a “Thatcher-era tax break” to help families cut their monthly payments. But such a policy would not only cost a lot of money, it would also defeat the purpose of the Bank of England’s rate rises: Jeremy Hunt himself has said a new Miras scheme would be inflationary.

Such proposals risk being a distraction from more pragmatic, cost-effective options that get to the root of the problem: policies that strengthen the UK’s mortgage safety net and offer struggling mortgage holders security for the long term. As the SMF highlighted in early 2021, a time when homeowners’ finances and the economy were profoundly impacted by the pandemic, there is an important role for public policy in preventing a socially and economically damaging rise in home repossessions.

Towards a stronger mortgage safety net

There are a diverse range of international mortgage relief models that we can learn from. In Australia, homeowners are allowed early access to pension wealth in the event of severe financial hardship. The US Hardest Hit Fund introduced direct subsidies to help aid mortgage payments and transitions to alternative tenure. Whether they provide access to advance payments, cash support, or payment adjustments, we found many different approaches to supporting over-indebted homeowners.

Having examined the state of the UK’s mortgage safety net and considered the nature of the safety net in other countries, we drew up some recommendations of our own. We thought (and still think) there are a number of other useful avenues the government could explore for refining the UK’s mortgage safety net:

1. Enhancing private safety nets, such as encouraging wider uptake of mortgage payment protection insurance among those that can be reasonably expected to afford it. The focus of policy in this space would be on education and communication, ensuring that mortgage holders are aware of the existence of these products.
2. Bolstering social safety nets, for example by providing grant periods for those with limited financial distress. This would ensure that those suffering a temporary loss of income receive support for housing costs during a period of hardship, without the risk of building up further financial issues from having to take on an additional loan.
3. Improving transition of tenure through enhanced Assisted Voluntary Sales, doing more to help borrowers at risk of repossession to leave their property rather than get further into debt. This could include removal of early repayment charges to help sell a property or assistance with estate agent fees on sale of their property.
4. Introducing more flexible tenure, for example ‘Home Trust’ entities, with trustees being the mortgage lender and the householder. In contrast to shared ownership, individuals could increase or decrease their ownership stake by incremental amounts rather than large equity shares, making it easier for individuals to find a balance of mortgage and rent payments that works for them.

All mortgage safety nets will have their merits and drawbacks. But these examples demonstrate that there is a wide range of sensible, ambitious options available to government. Given the implications of the current crisis for vulnerable homeowners, with the risk of home repossessions rising, it should seek to enlarge and strengthen the mortgage safety net.

This short blog is informed by the SMF report, ‘Safe as Houses: strengthening the UK’s mortgage safety net’. Do read that report for detail.