Introduction

In today’s Britain, economic inequality and housing affordability stand as towering challenges that define our era. The wealth gap has widened dramatically, with the richest 1% owning nearly half of global wealth, while millions struggle to secure a foothold on the property ladder. In cities like London, where the average house price exceeds 14 times the median salary, home-ownership has become an elusive dream for many. This disparity is not just a statistic—it represents a fundamental social imbalance that threatens the cohesion of our society.

Traditional lending practices worsen this inequality. Banks typically offer lower interest rates to borrowers with substantial assets, considering them lower risk, while those with fewer assets face higher rates due to perceived risk. This creates a vicious cycle: the wealthy accumulate more assets through property investments, often for rent or speculation, while low-asset individuals remain trapped in a cycle of renting, unable to build equity or wealth.

This blog post proposes a radical yet market-driven solution: interest rates that are inversely proportional to a borrower’s total assets. Unlike government-backed schemes, this approach leverages the financial system itself to promote fairness. By charging higher interest rates on loans for high-value properties or investment purchases, the system subsidises lower rates for affordable homes. This mechanism not only makes home-ownership more accessible to those with fewer assets but also encourages productive investment from wealthier individuals and companies.

The Current Challenge

The housing market is increasingly dominated by speculative investments and rent-seeking behaviour. High-asset individuals and corporations often purchase existing properties not to live in but to generate income through rent or to speculate on rising property values. This reduces the availability of homes for potential owner-occupiers and drives up prices, making housing unaffordable for many.

Moreover, the ultra-wealthy frequently use loans against their assets to access capital without selling holdings, avoiding capital gains taxes and further concentrating wealth. Meanwhile, first-time buyers with modest savings face high interest rates, making monthly mortgage payments burdensome.

Consider this: in 2023, the average UK first-time buyer needed a deposit of over £50,000, with many borrowing at rates around 4-5%. For a £200,000 home, this translates to monthly payments of approximately £1,055 at 4% interest over 25 years. For someone earning the median UK salary of £33,000, this represents a significant portion of their income, leaving little room for savings or unexpected expenses.

In contrast, a wealthy investor purchasing a £500,000 property for rental income might secure a loan at 3%, paying around £2,372 per month. With rental yields averaging 3-5% in many UK cities, this investor can cover their mortgage and profit, further accumulating wealth.

This disparity highlights the need for a fairer lending system that addresses both economic inequality and housing affordability.

The Proposed Solution

The asset-scaled interest rate system offers a novel approach to lending. By making interest rates inversely proportional to a borrower’s total assets, the system ensures that those with fewer assets can access affordable loans, while wealthier borrowers contribute more to the system, particularly when engaging in speculative or rent-seeking activities.

How It Works

1. Lower Interest Rates for Low-Asset Individuals: Borrowers with minimal assets (e.g., total assets under £100,000) seeking to purchase affordable homes (e.g., properties under £300,000) would qualify for significantly lower interest rates, such as 2%. This makes monthly payments more manageable and home-ownership more attainable.
2. Higher Interest Rates for High-Asset Individuals and Companies: Wealthier borrowers (e.g., total assets over £500,000) looking to purchase existing properties, especially for investment purposes, would face higher interest rates, such as 5%. This reflects the reduced social value of speculative purchases and helps subsidise lower rates for low-asset borrowers.
3. Incentivising Productive Investment: To encourage the creation of new housing, loans for constructing new homes or developments could offer more favourable rates, even to high-asset individuals and companies. For example, a wealthy investor building new homes might secure a rate of 3.5%, promoting productive investment that benefits the economy and addresses housing shortages.
4. Adjusting for Property Value: To prevent abuse, interest rates would also consider the value of the property being purchased. If a low-asset individual attempts to buy a high-value property (e.g., a £1 million home), their interest rate would adjust upward (e.g., to 4%), ensuring that subsidies target those in genuine need.

Mathematical Example

Consider two borrowers:

• Borrower A: Total assets of £50,000, seeking a £200,000 mortgage for a first home.
• Borrower B: Total assets of £1,000,000, seeking a £500,000 mortgage for an investment property.

Under the current system:

• Borrower A might face a 4% interest rate, with monthly payments of approximately £1,055.
• Borrower B might secure a 3% rate, paying around £2,372 per month.

Under the proposed system:

• Borrower A qualifies for a 2% rate, reducing monthly payments to approximately £848.
• Borrower B faces a 5% rate, increasing payments to approximately £2,922.

The difference is stark: Borrower A saves £207 per month, making home-ownership more affordable, while Borrower B pays an additional £550 per month, which helps subsidise the lower rate for Borrower A.

If Borrower B instead chooses to invest in new construction, they might qualify for a 3.5% rate, paying approximately £2,502 per month—still higher than the current system but lower than the 5% for buying existing properties. This incentivises productive investment.

Balancing the Lending Portfolio

To illustrate how the system balances, consider a bank with:

• 100 loans to low-asset borrowers: £200,000 each at 2%.
• 50 loans to high-asset borrowers: £500,000 each at 5%.

Total loan amount:

• Low-asset: 100 × £200,000 = £20,000,000
• High-asset: 50 × £500,000 = £25,000,000
• Total: £45,000,000

Annual interest income:

• From low-asset: £20,000,000 × 2% = £400,000
• From high-asset: £25,000,000 × 5% = £1,250,000
• Total: £1,650,000

Average interest rate: £1,650,000 / £45,000,000 ≈ 3.67%

This average rate is competitive, ensuring that lenders maintain profitability while redistributing wealth fairly within the system.

Benefits of the Asset-Scaled Interest Rate System

1. Increased Accessibility to Home-ownership:
   • Lower borrowing costs for low-asset individuals make home-ownership attainable, helping them build equity and long-term wealth.
   • This breaks the cycle of renting, promoting financial stability and social mobility.
2. Fair Redistribution of Wealth:
   • The system reallocates financial advantages from high-asset borrowers to those with fewer assets without government intervention.
   • It operates within the private sector, leveraging market mechanisms for fairness.
3. Reduction of Speculative Buying and Rent-Seeking:
   • Higher borrowing costs for purchasing existing properties discourage speculative investments that inflate housing prices.
   • This helps stabilise the housing market and makes homes more affordable for owner-occupiers.
4. Encouragement of Economic Growth:
   • Incentivising investment in new construction stimulates job creation and increases housing supply.
   • Productive investment contributes to overall economic health and addresses housing demand.

Addressing Potential Concerns

While the proposal offers significant benefits, it is essential to address potential challenges:

1. Implementation Complexity:
   • Asset Verification: Accurately assessing borrowers’ total assets requires robust verification methods. Fintech solutions, such as APIs connecting to bank accounts and investment portfolios, can streamline this process.
   • Infrastructure Adaptation: Lenders may need to update systems and train staff, but the long-term benefits justify these initial costs.
2. Impact on Lenders:
   • Profit Margins: While profit margins may shift, the subsidisation mechanism ensures overall balance. Additionally, increased home-ownership can expand the customer base.
   • Risk Management: Lenders may need to adjust risk models, but the system can include measures like higher deposits or insurance for low-asset borrowers to mitigate risk.
3. Risk of Circumvention:
   • Evasion Strategies: High-asset individuals might attempt to conceal assets. Regulatory oversight, certified asset statements, and penalties for misrepresentation can deter abuse.
   • Property Value Adjustments: Scaling rates with property value prevents low-asset borrowers from exploiting low rates for luxury purchases.
4. Market Dynamics:
   • Housing Demand: Increased accessibility could raise demand for affordable housing. However, incentivising new construction helps address supply shortages.
   • Investment Behaviour: Wealthy investors might redirect funds to other assets, but the system encourages productive domestic investment, benefiting the economy.

Conclusion

The asset-scaled interest rate system presents a fair, market-driven solution to economic inequality and housing affordability. By restructuring interest rates based on borrowers’ total assets, the financial system becomes a tool for wealth redistribution without relying on government subsidies. This approach:

• Empowers Low-Asset Individuals: Making home-ownership attainable promotes financial stability and social mobility.
• Discourages Non-Productive Investments: Higher costs for speculative purchases reduce activities that inflate housing prices.
• Encourages Economic Growth: Incentivising new construction addresses housing shortages and stimulates economic activity.
• Operates Independently: Leveraging existing financial infrastructure minimises the need for new regulations or taxpayer-funded programmes.

Implementing this system requires careful planning, transparent processes, and collaboration between financial institutions and regulators. By proactively addressing challenges, society can move towards a more equitable future.

Moving Forward

This proposal invites a paradigm shift in how we approach lending and wealth distribution. Stakeholders—including banks, borrowers, policymakers, and regulators—must engage in dialogue to refine the concept and address practical considerations. Through collective effort, we can create a lending environment that balances risk, rewards productive investment, and promotes fairness.

Note: This proposal aims to spark discussion on innovative, market-based solutions to societal challenges. It is a thought experiment, and we welcome feedback and further ideas.