policy to help smooth out housing and other property based costs for North
into South businesses
The Bank of England is responsible for setting the Bank Rate at a level which keeps national inflation within limits set by the government. The snag is that during boom periods when inflation is rising, the boom favours the national prosperity hot spots, mainly the South East of England. As the last Governor of the Bank of England famously pointed out, during such times, it is necessary for the less prosperous regions of the UK to accept a high Bank Rate for the greater long term good of all.
Regional Bank Rates, which vary according to local inflation would not be a viable solution because investors would simply borrow money in regions where interest rates were low and invest the money in regions where the interest rates were high. There is however one exception to this economic rule: Because land and permanent buildings are immobile, effective interest rates on loans to purchase land and property could be adjusted to meet local conditions.
This is how the proposal would work:
The Bank of England should be given the power to set a "Surcharge Interest Rate" (SIR) which is added to the prevailing mortgage rate set by the lender, when house price inflation is high. So, for example, if the current SIR was set at one percent, the lender would pay at their current loan rate of interest to the lender, plus an additional one percent.
However, unlike the present system where mortgage payers
see nothing in return for making higher interest
payments when interest rates
go up, the additional SIR payments would be paid into a
bonded long term savings
account and would earn interest. At some point in the life of the mortgage
repayment, the mortgage payers savings in their bonded
will equal their outstanding mortgage dept. At this point, their savings
could be used to pay off the remaining mortgage dept early.
What would happen if Britain decided to adopt the Euro?
In this case the Bank of England would lose the right to set the Bank Rate but it would still retain the right to set the additional Surcharge Interest Rate. This would help decouple the British housing market from swings in the wider European non-housing markets. If other national governments within the Euro zone chose to adopt the SIR concept, then the whole of the Euro zone would benefit because the problems caused by a "One size fits all" interest rate for the Euro zone would be reduced.
Would existing borrowers have to open a bonded savings account?
No. House buyers only bring inflation into the market at the time of purchase. For the scheme to be fully effective, it will only be necessary for bonded savings accounts to be opened when a new mortgage agreement is entered into.
Is the surcharge interest rate likely to be a significant burden for borrowers?
Probably not. Current house price inflation is stoked up by purchasers who feel pressurised into buying a new property, before the selling price exceeds their means. Our proposal would have a long term calming effect on the market, taking away the pressure on potential house buyers to purchase early. This in turn would reduce the need for a high surcharge interest rate.