In December Jeremy Hunt hosted a mortgage summit, attended by lenders and the Financial Conduct Authority, to discuss rate woes. At the time, the numbers were at least moving in the right direction. During Liz Truss’s 49-day premiership, the FCA expected interest rates to rise to 5.5 per cent, an increase which was forecast to put 570,000 people into mortgage payment difficulty. Once Rishi Sunak and Hunt undid Truss’s mini-Budget, things looked calmer: a 4.5 per cent peak was expected, and 356,000 people were due to be in difficulty. Hunt was still struck by the figure. Horribly high, he thought.

The Chancellor used the meeting to lay the foundation for regulatory changes that could be used in the future to help struggling mortgage-holders. Now, as interest rates are expected to hit 6 per cent, which would be the highest since 2001, the Treasury is working with lenders to consider repayment holidays, mortgage extensions and moving more people to interest-only payments. Not so long ago 6 per cent was the gloom scenario used by the Bank of England to stress-test mortgages – an eventuality ‘not expected or likely to materialise’. Today, it’s the consensus. Some 1.3 million mortgage-holders are expected to renew their mortgage before Christmas. For many, interest payments will treble.

It’s not hard to predict what happens next: agony for anyone renewing, fear for those a year away from doing so, and despair for first-time buyers who can see the cost of ownership soaring. Panic is setting in. Home ownership is starting to look more like a trap than a ladder.

A whole generation is starting to experience the forces that rattled the economy in John Major’s premiership. Rate rises are crushing disposable incomes, first for renters and now for homeowners. This disorientates a generation who had been told that they were in an era of ‘low for long’ rates. Millions based their finances and lifestyles on this faulty assumption. Thirty-five per cent of mortgage-holders have two years or less to run on their deal, or a floating rate.

Back in 2020, the penny had still not dropped for most politicians, economists or even central bankers that the era of ultra-low interest rates was about to come to an end. The Bank of England was printing money almost as fast as the government was spending it, in the belief that there would be no price to pay. Official forecasts, now agreed by even the Bank’s governor to be defunct, suggested that the inflation rate would always come back to 2 per cent. The Bank had a new way of thinking: that inflation was confined to the history books, and interest rates would stay low.

It was wishful thinking, and dangerously wrong. The problem isn’t simply that rates are rising. It’s the uncertainty of where they will peak that has borrowers and lenders panicking. Only two months ago, markets expected rates to peak at 4.5 per cent. Two weeks ago, it was 5.25 per cent. Now it’s 6 per cent. Who knows where it will be in a month’s time?

Bank rates are still far below where they were in the early 1990s during the last mortgage crunch. What’s so worrying about today’s climate is that the return of rates to historically normal levels is causing such alarm. In a highly leveraged economy, normal rates are still considered too much financial pressure to bear. Mortgage payments now gobble up 37 per cent of the take-home pay of a first-time buyer. It has been this high only twice before: during the 2008 crash and during Major’s recession.

For some homeowners – especially those who bought at the top of their budgets, assuming their repayments would never budge – their properties could become unaffordable.

Some will view the coming mortgage payment pain as a regrettable but necessary correction in a deeply distorted housing market. ‘This economic fairy tale we’ve been living in means that some will think it’s grossly unfair to return to the real world, with normal interest rates,’ says one MP. But while some homeowners have been huge beneficiaries of low rates, becoming millionaires off the back of skyrocketing home values, this has come at the expense of others – particularly the young – who have seen house prices rise far beyond their reach.

The prospect of higher interest rates is politically very hard for Sunak. His premiership has been about making difficult decisions. He raised taxes in the hope that it would assuage markets and lower interest rates. So far the tax pain has arrived, but the mortgage relief has not. It won’t just be the over-leveraged who struggle. Those who renew their mortgages will confront an average £2,900 a year in additional interest rate payments, according to the left-leaning Resolution Foundation. By the next election, if millions of voters are struggling with rising interest rates along with the highest taxes in peacetime history and the deepest-ever fall in living standards, any Tory election pledge about stability will sound rather hollow.

Already MPs, including Tories, are calling on the government to provide fiscal support, perhaps something like the mortgage tax relief promoted by Margaret Thatcher. Since the pandemic, the government’s knee-jerk reaction to any crisis has been to print money and splash the cash. Will ministers be able to resist the temptation to respond to a mortgage crisis – which disproportionately affects Tory voters – by once again opening the Treasury’s coffers?

For now, Hunt says he is determined to resist the pressure from MPs to provide mortgage relief schemes. Any tax break or handout is ‘dead on arrival’, says one Treasury insider. Not only are such support schemes ‘distortive and regressive’ (how would you justify them to renters?), but any spending package also risks fuelling inflation, continuing the cycle. ‘The so-called medicine would make the disease worse.’

Unless Hunt blinks, the Tories only have regulatory reform to soften the blow. Not everyone is happy with the idea of more tinkering. ‘It’s not exactly market purism,’ says one Tory MP, ‘but better than when we were pushing price controls.’ Some of the ideas being discussed, including mortgage extensions, will have to be longer-term, as mortgage rates would need to fall substantially for anyone to want to lock in for decades.

Control over interest rates remains firmly in the hands of the Bank – one reason why Sunak’s pledge to ‘halve inflation’ by the end of the year was rather misleading in the first place. But there is a wider understanding throughout government that any borrowing spree could make the situation much worse.

That’s saying something. ‘Let’s just pray the inflation figures are better than expected,’ said Graham Cox, founder of a self-employed mortgage brokerage, at the news of 6 per cent two-year fixed-rate mortgages. ‘If they are, rates may fall as quickly as they’ve risen over the past couple of weeks. If they’re worse, hold on to your hats.’

No such fall seems to be happening: this week’s inflation rate figures didn’t budge, sticking at 8.7 per cent on the year last month. Most worryingly, core inflation (which excludes energy and food) rose to 7.1 per cent on the year in May, up from 6.8 per cent in April. This strongly suggests that the many external factors the Bank would like to blame – supply chain breakdowns during the pandemic, a surge in energy prices due to the war in Ukraine – aren’t the main problem.

The Bank still struggles to admit that it was mass money-printing that contributed so heavily to an inflation spiral; that perhaps it’s failing to take the heat out of the economy because it pumped so much ‘free’ money into it. Pandemic cash is still sloshing around. Oxford Economics estimates that the total excess savings held by households accumulated at the height of the pandemic now ranges somewhere between 6 per cent and 12 per cent of the UK’s total GDP. This money keeps being drip-fed by consumers into the economy, driving up prices. All this demands higher rates which, in turn, will keep affecting the mortgage market.

If pressure keeps rising – if people start losing their homes – will ministers budge? ‘The politics is bad for us when mortgage costs rise,’ says one government insider. ‘But the politics is going to be a lot worse if we start helping well-off people pay their mortgage.’

It is impossible to separate the looming mortgage crisis from the wider housing crisis that has been plaguing Britain for decades. The utter failure to build enough homes throughout the 2000s and 2010s has created a generational divide in which homeowners tend to be older and better off. Home ownership for those aged between 25 and 34 was down from 51 per cent in 1989 to 28 per cent in 2019, according to the right-leaning Centre for Policy Studies. For the poorest young people, it dropped from 24 per cent to just 11 per cent. These distortions have been propped up for a long time.

Still, however rigged, Britain’s housing market – a stock worth almost £9 trillion – remains the bedrock of the economy. At the height of the first lockdown, people weren’t allowed to sit on a park bench, but they were allowed to view flats. The reason for this was not scientific or health-related, but economic: if any part of the economy had to be preserved, it was the housing market, especially in a time of such uncertainty. This time around, the uncertainty can’t be mitigated.

The housing crisis won’t be solved by the next election. But could some confidence be restored? ‘It could be,’ says a minister. ‘Between today and, say, a late-October election is the same interval of time of John Major coming in and the 1992 election. There’s still time to turn it around.’

Perhaps – but not much.