Who’s to blame for rising mortgage costs?

Mortgage costs have reached a 15-year high today, with the average two-year fixed deal hitting 6.66 per cent – the highest level since the summer of the 2008 financial crash. But today’s mortgage news is being pegged to far more recent history, as average deals just topped their peak from last autumn, when Liz Truss’s mini-Budget sent interest rate expectations soaring, and mortgage offers along with them.

Truss’s premiership came to an end because so many numbers were spiralling upward, including the cost of government borrowing, mortgage repayments, and the number of Tory MPs who – amid all the chaos – were simply not going to take instructions from her government. Rishi Sunak’s promise when entering No.10 was not just to restore credibility, but to calm the markets and get these costs under control. It seemed to work at the start, as borrowing costs fell – as did mortgage deals – and MPs (broadly) fell in line. 

Now that average mortgage deals are not far off 7 per cent – and gilt yields have steadily climbed back up, too – has Sunak failed to make good on that promise? Some Trussites see today’s news as vindication that they were right (or at least, not completely wrong); that the blame placed at Truss’s feet for surging costs was due to other factors. Steerpike reminds us that Sunak made mortgage rates his big talking point during the leadership campaign last summer, setting up an online calculator (now deleted) so people could see what would happen if Truss’s fiscal policies led to a surge in rates of around 7 per cent – a figure one of her economic advisors, Professor Patrick Minford, said at the time was possible. If that calculator still existed, it might be showing figures even more financially painful than what would have been calculated last year.

One of the many consequences of higher interest rates – currently expected to peak around 6.5 per cent – is higher mortgage payments. So why are expectations soaring now? Last autumn, they shot up as a direct consequence of government announcements.  Not only had Truss’s government just announced an Energy Price Guarantee which – at the time – was estimated to be one of the biggest handouts pledged by a British government; it was also announcing tax cuts (small in comparison to the spending promises), all on the assumption they could simply borrow the money to do so. Never mind that interest rates were starting to rise across the world, which should have been a signal that this was not necessarily the time to test a spending spree. Team Truss not only thought they could continue to borrow with impunity, but that markets would see what the government was trying to do and happily finance the transition from a stagnant economy to a high-growth one. 

Moreover, her economic advisors were in agreement that rates actually needed to rise. Though never explicitly stated by Truss, the overarching goal was to rebalance fiscal monetary policy, loosening the former to force the latter to tighten: an over-correction to the ‘disastrous mistake’ to keep rates artificially low, Minford told me last September ahead of the mini-Budget. 

There’s no doubt Truss and her team were onto something: the liability-driven investment (LDI) pensions scare, the regional banking crisis and a growing mortgage crisis are all consequences of keeping rates so low for so long. But that over-correction went a bit too far, as Truss’s fiscal announcements led to an almost-immediate surge in borrowing costs, as international markets demanded a higher return for what they saw as sloppy spending behaviour. 

The same cannot be said of Sunak and his government. The controls on public spending are much tighter. He and his chancellor’s desire to make the Treasury's book’s look slightly more appealing have delivered a different kind of fiscal pain: a tax burden that has risen past Boris Johnson levels, currently at a post-war high. 

Still, interest rates are rising, and peak expectations keep going up. But this time round, it's not the sharp, shocking spike we saw last autumn, but rather a steady and persistent climb. That’s because the reasons behind the expectations are different: they are not driven by some fiscal experiment currently taking place within the government. Instead, they are driven by stubborn inflation, which is not falling anywhere near as fast as originally predicted.

No one expected such a difficult battle with inflation last autumn, or even at the start of the year, when the headline rate was expected to fall close to the Bank’s target by 2 per cent by the end of 2023. Now, the Bank can’t stress enough that its inflation forecasts are skewed to the upside, as fears across Whitehall grow that Sunak may not even meet his pledge of ‘halving inflation’ by the end of the year. 

As it has dawned on the Bank that it was far too optimistic in its original predictions, its actions have had to become more hawkish, bringing in its 13th consecutive rate rise last month, taking the bank rate to 5 per cent. This is causing the spikes we’re seeing in mortgage deals, happening so fast that major banks are having to pull mortgage offers with virtually no notice, as rate expectations continue to rise.

The problem for Sunak is not accusations from Trussites that he was wrong and she was right, but rather that he has strayed away from his leadership campaign narrative, which was much more pessimistic but ultimately correct in its analysis about inflation. Last summer, Sunak openly admitted that inflation was largely out of everyone’s hands, and the best thing governments could do was keep a tight grip on the spending reins, so rates wouldn’t need to rise higher than necessary to tackle it. This year, he has decided to suggest instead that government has the power to halve inflation.

As a result, his government is increasingly being blamed for stubbornly high inflation and rising rates, when these things primarily sit with an independent Bank. As a result, he’s far more open to attack, not just from disgruntled MPs, but far more importantly, from the public.