If slightly dry economic arguments for Remain don’t grab you, here’s one Chancellor George Osborne thinks might just do the trick: leave, see mortgage repayments go up.
“The Bank of England is independent and makes it decisions on interest rates,” Osborne said. “But the overwhelming view of experts… is that if Britain leaves the EU, prices would go up and there would be instability in financial markets. That means it’s likely that mortgage rates would go up”.
The Chancellor is right to warn that mortgage rates may go up, but for the wrong reasons. It is far from clear that the Bank of England will put up base rates. The Bank itself has said only that it will continue to set policy to meet its inflation target.
Leaving the European Union would probably cause the pound to fall sharply. That, in turn, would push up inflation. However, leaving the EU would also cause serious disruption to the economy. In such a scenario, the Bank would probably view the increase in inflation as a blip and try to spur activity by keeping rates lower for longer. This was viewed as the most likely outcome by 17 out of 26 economists surveyed by Reuters.
Of course, if higher risks and a falling pound cause overseas lenders to get twitchy, the Bank could have something of a headache, facing the prospect of having to raise interest rates at a time when the UK economy is slowing. But this is not the most likely scenario.
On the other hand, the risk premium paid by the British government for its borrowing is likely to go up if we quit the EU. This would push up long-term interest rates for all borrowers, even if the Bank of England didn’t put up base rates. What’s more, if a Brexit leads to lower growth and higher unemployment, lenders might require higher payments from borrowers.
What this will mean for mortgage holders depends on their deal. Existing borrowers locked into fixed rates are insulated against any change until their fixed term runs out. That could be anywhere between two and 10 years after taking out the loan. New borrowers and those with variable rate loans could feel the pinch if lenders choose to charge a higher mark-up on the Bank rate.
This might all seem speculative. But speculation is really all we have to go on; we don’t know, and indeed can’t know, what will happen if we leap into the dark on June 23. All we can do is take our best guess on available evidence; and the outlook isn’t good for those with mortgages.
The Treasury did not respond to requests for comment.
Edited by Hugo Dixon