The Conservatives and Labour disagree in their projections of how policies could influence interest rates (PA)

14 June 2024

Fact check: Labour says Tories will add £4,800 to your mortgage

14 June 2024

As part of the Labour Party’s reaction to the unveiling of the Conservative manifesto, shadow chancellor Rachel Reeves held a press conference criticising it as a “desperate wishlist”, stating: “The money is not there, and it will mean £4,800 on your mortgage.”

This specific additional mortgage cost was repeated in the Labour Party’s social media posts.

Evaluation

When asked for a breakdown of how they calculated this figure, Labour provided a long document which did not include the full calculation.

It appears that in specific circumstances laid out in the Labour Party document, interest payments could be £4,800 higher for some borrowers, but that figure is over several years.

There is also disagreement between Labour and the Tories about the cost of spending commitments in the Conservative manifesto.

The facts

According to Labour’s report into the costings of the Conservative manifesto, the Conservatives would have to borrow an extra £70.57 billion to fund the commitments in it over four years.

Even setting aside the reliability of the £70.57 billion figure – and the Conservatives dispute this number – Labour has to make several assumptions to get from there to £4,800 added to mortgages.

It is calculated based on “an 85% mortgage on the average house in the UK” and the figure is spread “over the Parliament” and assumes that Government borrowing will push up the Bank of England’s base interest rate.

Borrowing and interest rates

One assumption Labour makes is based on a Treasury estimate about the impact of Government borrowing on interest rates. This is measured as Government debt as a proportion of gross domestic product (GDP).

That estimate says for every one percent increase in debt to GDP – about £25 billion – interest rates might rise by between 0.50 and 1.25 percentage points.

Labour appears to use the higher end of that range for its calculations.

If re-creating what the PA news agency believes to be Labour’s figures, but substituting 1.25 for the lower end of the range, the figure of £4,800 is reduced to £1,920 over four years.

Loan-to-value

Another Labour assumption that appears to underpin its calculations seems to be an 85% loan-to-value (LTV) ratio.

That is the amount of the loan taken out compared with the value of the house. If you borrow £85,000 to buy a £100,000 house then you have an LTV of 85%.

The average price of a UK home was £285,000 in December. Figures from banking trade body UK Finance show the average (mean) LTV ratio of new mortgages and re-mortgages was 69.9% in 2023, significantly lower than Labour’s example.

Using what is thought to be the Labour Party’s calculations, but replacing the 85% LTV with 69.9%, would reduce Labour’s figure to around £3,947 over four years.

The average LTV across all outstanding home loans across the UK is around 47%. Plugging that in to Labour’s model suggests £2,654 over four years.

If combining a 47% LTV figure and the lower end of the impact of borrowing on rates, it leaves increased interest payments totalling £1,062 over four years.

How might Labour have come up with its figures?

Labour’s document contains four paragraphs on its calculations. It says that the Tory plans will lead to £70.57 billion of extra borrowing over five years. It says that per year this is around 0.4% of GDP.

That, it claims, would mean that “for someone with an 85% mortgage on the average house in the UK this could increase mortgage payments by £4,800 over the Parliament.”

The PA news agency was able to replicate the £4,800 figure by taking the average house price in December 2023 of £285,000 and using the Office for Budget Responsibility’s forecast for GDP to be £2.786 trillion in the year ending March 2025.

With Labour’s assumption of an 85% LTV mortgage and the average £285,000 house price, that would leave the buyer with an overall mortgage value of £242,250.

The extra borrowing of £11.04 billion that Labour claims will happen under the Conservative plans in the year ending March 2026 would be a little under 0.40% of GDP.

When taking Labour’s assumption that for every one percentage point of GDP that borrowing rises by, rates will rise by 1.25 percentage points, a 0.40 point rise in debt would lead to rates rising by a little under 0.50 percentage points.

An interest rate increase of a little under 0.50 percentage points on a loan worth £242,250 would cost the borrower just under an extra £1,200 per year. That would translate into just under £4,800 over a four-year period.

How accurate is the £70.57 billion claim?

The claim from Labour that Conservative policies leave a £70.57 billion black hole is based on the assertion that its plans will cost £115.26 billion over five years and only raise £44.66 billion in revenue for the Exchequer in the same period.

The Conservatives, on the other hand, say that their policies will cost £63.88 billion but raise £65.90 billion over the same period.

In most areas the two parties agree on how much the Conservative plans will cost or raise. The biggest disagreement is over much money the Conservatives can save from their ideas to reform the welfare system.

The Tories claim they could save £20 billion over the period through welfare reform. Labour argues that the Conservatives “have not put forward any concrete proposals”, and that the money that could be saved is already factored into the baseline figures, so is not future savings.

Another big disagreement is the annual cost of the Conservatives’ national service plan for 18-year-olds. Labour claims it would cost £18.81 billion, including money raised by scrapping the UK Shared Prosperity Fund, while the Conservatives say it would cost £2.4 billion.