The chancellor is considering extending the government’s mortgage guarantee scheme, after UK bank bosses raised concerns over the state of the UK’s mortgage market at a high-level meeting at No 11 Downing Street.
The meeting on Thursday – which was attended by chief executives including Alison Rose of NatWest, Charlie Nunn of Lloyds Banking Group, HSBC UK’s Ian Stuart, Mike Regnier of Santander and TSB’s Robin Bulloch – was scheduled amid mounting fears about the potential fallout from rapidly rising mortgage rates.
Executives, including those from Barclays, Nationwide, Virgin Money and Starling Bank, were asked to weigh in on a number of options to support consumers struggling to secure mortgages after the government’s mini-budget sent UK financial markets into meltdown last week.
It is understood the chancellor, Kwasi Kwarteng, is now considering extending the mortgage guarantee scheme beyond its December deadline.
The scheme gives banks and building societies the chance to buy a guarantee from the government on the slice of the mortgage between 80% and 95% of the property’s value. It means that if a borrower gets into financial difficulty and their property is repossessed, the government will cover that portion of the lender’s losses.
The programme was revived last year during the pandemic, in order to keep 95% mortgages available to borrowers, amid fears house prices might crash.
However, the pandemic ended up pushing house prices even higher. Analysis from April 2021 found single buyers in their 30s on the UK median wage would still be unable to buy a home in about half of local authority areas in England and Wales, despite the help the scheme would supposedly provide.
While the mortgage guarantee scheme does not directly tackle the issue of rising rates on new fixed home loan deals – as it is money market “swap rates” that largely determine their pricing – the policy will provide reassurance to lenders at a time when a number of forecasters are predicting house price falls of perhaps 10% or more. The government will be hoping that feeds through to the pricing of low-deposit mortgages in particular, as it may mean lenders do not feel they have to price in a sizeable premium because of the uncertain economic climate.
The guarantee compensates a lender for losses suffered in the event of the property having to be repossessed.
The meeting with bank bosses came after a challenging week in which the average two-year fixed mortgage rate rose above 6% for the first time since 2008.
Interest rates on mortgages have surged after the mini-budget, which pushed the pound to record lows and caused UK government bond prices to collapse, amid concerns over the country’s long-term economic health.
The meltdown ultimately raised long-term interest rate expectations and made it more difficult for UK banks to properly price mortgages. That resulted in a mass withdrawal of home loans last week, with nearly 40% of mortgage deals being pulled at one point before banks started to return with new products often priced 1-2% higher.
Supervisors at the Financial Conduct Authority (FCA) have since been asking banks how they plan to step in to support mortgage borrowers.
The average new two-year fixed rate – which was 4.74% on the day of the mini-budget – rose again on Thursday to 6.11%, according to the data firm Moneyfacts. That is compared with 5.75% on Monday, then 6.07% on Wednesday. Meanwhile, five-year fixed mortgages rose to an average rate of 6.02% on Thursday.
While one executive described the meeting as “productive and supportive”, bankers were understood to have stressed that recent volatility in markets had hurt the mortgage market.
The Labour leader, Kier Starmer, also took a swipe at the government’s impact on the mortgage market on Thursday. “The prime minister has taken the economy, driven it into a wall, and [is] pretending that this is pro-growth,” he said during a visit to Bilston, Wolverhampton. “If you have consequences that increase mortgage payments by hundreds of pounds per month, that is anti-growth. It’s a destroyer of growth. It certainly isn’t pro-growth.”
UK bank executives are also understood to have raised concerns about the FCA’s incoming consumer duty regulations during the meeting on Thursday. While the rules are meant to put consumer interests at the heart of financial services’ decision making, bosses claimed it could block banks from offering products that could help customers long term.
Some bosses also raised questions about ringfencing regulation that separates regular savings and current accounts from investment banking operations, while executives from smaller banks discussed lowering the amount of loss-absorbing capital they need to raise and hold against risky assets.
Thursday’s meeting followed similar ones with asset managers and investment bankers last week, who were quizzed about their own ideas to stimulate growth and investment from the City and how the government could calm markets.
Kwarteng and Liz Truss have tried to emphasise their pro-business, pro-City stance, including scrapping the EU banker bonus cap and planning “an ambitious package of regulatory reforms” schedule to be unveiled by the end of October.