Britain’s mortgage-hike timebomb is the price homeowners will pay for decades of policy failure

One of the central tenets of Britain’s political right is that individual agency is morally and economically superior to any form of collective action, regulation or public institution; in its eyes, the latter are all innately inefficient and degenerate.

Thus, over the decades, the door has been opened to multiple economic and social disasters. Think careless financial deregulation and the financial crisis, or the unleashing of too much deindustrialisation or the free-for-all that led to the cladding debacle. But this year another disaster with the same roots is unfolding – and devastating for those on the receiving end.

Back in the dark days of Covid in 2021, interest rates were pitched at 0.1% almost all year. Homeowners could fix their mortgage for five years at 1% or less – a fantastic deal – and 1.8 million did just that. But in 2026, Mephistopheles is about to collect. Those fixes are expiring, with the interest rate on mortgages defaulting to a higher standard variable rate currently just above 7%. Hopefully, many mortgagees can fix again (at the expense of another round of crucifying fees), but even so, still at 6% or just under – if you are lucky enough to have a lender still offering fixed-rate mortgages.

Either way, it is a shock to anyone’s personal finances. Some readers of The Observer will be going through the pain of now having to find massive budget savings – on average of between £600 and £700 a month – to pay the higher interest rate, or if the mortgage is larger than average, much more. Almost all of us have friends or adult children bewildered by the sudden change in their fortune: one friend of a colleague regards herself as de facto bankrupted. Britain is harder hit than other countries by the Iran war through its exposure to higher gas prices; rarely mentioned is how mortgage borrowers are disproportionately hit by the structure of our volatile, short-term fixed-rate mortgage market.

Other countries – even the US – don’t fetishise individualism, financial market freedoms and distrust public interest financial institutions to the same degree. They go all out with varying public systems of support aimed at fostering cheap 10-, 15- or 20-year fixed-rate mortgages.

Germany has its Kreditanstalt für Wiederaufbau bank backstopping specialist mortgage bonds to ensure that borrowers can borrow at cheap fixed rates even longer than 20 years; French banks issue similar mortgage bonds backstopped by the Credit Logément financial institution, so French homebuyers can borrow at a fixed rate, currently about 3%, for the entire 25-year term of a mortgage (the low rate one of the many benefits of being in the euro).

And the US has Fannie Mae – founded in Roosevelt’s New Deal, essentially to create long-term, fixed-rate mortgages through a similar backstopping mechanism to France and Germany’s – and its sister mortgage bank, Freddie Mac.

Britain? A measly HM Treasury mortgage guarantee scheme that underwrites fixed rates for five years. What we offer is risible: a neglect of our homebuying public. Researching my first book 40 years ago, I spent a day in the stacks of the US Library of Congress reading the many letters of thanks that distressed, indebted homeowners sent Franklin Roosevelt after his creation of cheap, fixed-rate, 20-year mortgages. It is a variant of what Winston Churchill called “the magic of averages”. By pooling and backstopping risks, the government lowers average costs and creates a social benefit – 20-year, fixed-rate mortgages.

It’s a similar story with pensions. Most people under 45 are not members of a pension fund that averages the good and bad luck of varying life expectancies and is large enough to invest across the gamut of great opportunities with their attendant risk to achieve good returns for pensioners. All is made worse by a derisory contribution rate matched by even more derisory contributions from employers, members ascribed their own little pension pot when they retire. Essentially, they face the ups and downs of investment and longevity risk by themselves. Employers, industry lobbyists and right-of-centre politicians plead it is trustees’ fiduciary obligation not to change anything – in effect, washing their hands of responsibility for a dysfunctional structure and indifferent returns. Millennials and zoomers don’t expect to be as well off as their parents; they are right.

Yet the attempt by the government to go some way to remedy the position in its proposed pensions bill is deadlocked in the House of Lords, a bone of contention being the government assuming a time-limited reserve power to mandate industry promises to invest – as Australian, Canadian, American and Dutch pension funds do - in promising homegrown private British companies. Good for pensioners; good for the economy. As the pensions minister, Torsten Bell, explained last week, the industry makes promises and doesn’t act on them. With these already watered-down new powers, it just may. Yet to try to haul the pensions industry into the same investment universe that other capitalist countries and pensioners occupy is to be accused of statist Stalinism.

Volatile mortgages and bad pensions are not where it ends. Some insurers and banks want to abandon the magic of averages and instead deploy an AI assessment of your private data to judge individual risk. Much more profitable. And if you find your credit card limit has been slashed, or if you are refused car insurance, data protection legislation forbids you from finding out why.

For decades, the totalitarianism of the left was properly seen as the enemy of freedom. Today, the new menace is an Orwellian totalitarianism of libertarians who by rejecting collective action impose risk, economic precarity and abuse of private power that ordinary folk are ill-equipped to bear. Time to sound the tocsin.

Photograph by Jason Alden/Bloomberg via Getty Images