What a Jeremy Corbyn government would mean for your mortgage

Labour Party leader Jeremy Corbyn
Labour Party leader Jeremy Corbyn Credit:  Getty Images Euroe

The possibility of a Corbyn-led government is the latest – and one of the most urgent – reasons for households to lock down the cost of their borrowing now, financial advisers and mortgage brokers have warned.

Mortgage rates already show signs of rising following the Bank of England’s November increase in Bank Rate from 0.25pc to 0.5pc. But if Corbyn were to take office the response of financial markets – in particular any impact on the value of sterling or British government bonds or “gilts” – is expected to translate rapidly into higher household borrowing costs.

Borrowers with certain types of mortgage could experience an immediate increase in outgoings. For others, higher rates would take longer to trickle through, but the effect on household incomes and property prices would still be “potentially very adverse”, commentators warn.

Last week saw the publication of several dire prognoses of what might result from a Corbyn government. Investment bank Morgan Stanley said Corbyn posed a greater threat to financial markets than a “hard” Brexit. Scotiabank analysts agreed, saying markets were underestimating the extent to which a Labour government would result in higher borrowing costs.

And on Thursday – in the most dramatic of recent cautions – Bank of England official Richard Sharp said further borrowing would undermine Britain’s entire financial stability.

Why would your mortgage rate go up?

One key determinant of mortgage costs is the yield on gilts – bonds issued by the UK government and traded on the open market by investors. Other factors are Bank Rate, and the rates at which mortgage lenders can raise capital from one another. Over time, the mortgage rates paid by ordinary home owners closely track these three instruments.

An economic shock or deteriorating outlook typically triggers investors to sell gilts, meaning their price falls. Their yields – the value of the fixed interest they pay to their owners expressed as a percentage of their market value – thus go up.

Most economists and City watchers believe Corbyn’s arrival at Number 10 would spark such a sell-off. His plans to add substantially to the national debt and to re-nationalise energy, rail and other major industries are expected to alarm investors and lead to a reverse in the decades-long decline in gilt yields (and mortgage rates) shown in the graph below.

Separately, a slump in sterling could have a similar effect.

A weaker pound – forced down by tumbling confidence of overseas investors – would push up inflation through the higher price of imports. The normal response of the Bank of England would be to raise Bank Rate, in turn feeding through to higher inter-bank lending costs and then reaching home owners through higher mortgage rates.

​Analysts at Scotiabank raised another risk: they said Corbyn’s dramatic public spending plans, if they come to fruition, could themselves spark inflation, leading to the same outcome of an earlier, faster increase in Bank Rate and dragging all borrowing costs higher.

David Hollingworth, mortgage market watcher at broker London & Country, agreed. He said: “Inflation is a key target for the Bank. If the pound was to weaken further then it could heighten the chance of further rate rises to control inflation.

“Spending plans could boost growth and that too could see an acceleration of rate rises. If markets see higher rates down the track then that can feed through to lenders’ funding costs, potentially pushing up mortgage rates irrespective of what ultimately transpires.”

By how much would monthly payments rise?

Brokers looking back at historic shocks say that lenders’ most extreme reaction – such as that which followed the banking crisis in 2008-09 – is simply to withdraw new lending from all but the safest borrowers. That would expose millions of existing borrowers to pay lenders’ “standard variable rates” which tend to move more or less directly in line with Bank Rate.

Morgan Stanley predicts Bank Rate will rise to 1.25pc over the next two years without any Corbyn effect – that’s 0.75pc higher than today.

If Bank Rate were to rise by half a percentage point, a borrower on an average fixed-rate deal today with a £150,000 repayment mortgage would pay approximately £40 more per month (£480 per year).

A 1.5 percentage point increase would lead to £115 more per month (£1,380 per year) and a 2.5 percentage point increase, taking Bank Rate to 3pc, would result in an extra cost of £197 per month (£2,364 per year).

The ‘delayed shock’ for borrowers on fixed rates

Ultra-low mortgage rates of recent years have prompted four in five borrowers to take out fixed-rate deals, where their rate is guaranteed not to rise for a typical two-year period.

After that period they must either switch to another new deal or pay their existing lender’s “follow-on” rate, known as a “standard variable rate” or SVR. The average of these SVRs is currently 4.31pc, according to the latest Bank of England data. By contrast the average two-year fix – which is the most popular deal, especially with first-time buyers – is 1.5pc. Some are below 1pc.

If markets were to react negatively to a Corbyn victory or other shock, these borrowers could leap from low to very high repayments in a short period. And if lenders rein in their activity – as happened following the crisis – they may have no choice.

Someone with a £200,000 mortgage at 1.5pc pays £804 per month. At today’s average SVR of 4.31pc, that leaps to £1,102.

Add a further percentage point for the “Corbyn effect” and at 5.31pc the borrower will pay £1,220 – that’s £5,000 more per year.

Mr Hollingworth said: “Borrowers face a period of uncertainty, whether it be from Brexit or further political upheaval. Either way it’s hard to see a reason why mortgage borrowers would not be considering pinning their rate down, especially when fixed rates remain so competitive.

“The recent base rate rise should act as a reminder of how costs can rise despite weak wage growth.”

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