Finance

Here is the news...

The mini-Budget had plenty to say, but was it good news or bad news for homebuyers? Kay Hill takes a closer look

Do you want the good news or the bad news?

The question is made all the harder at the moment because even the experts are struggling to work out which is which. New Chancellor (and three weeks later ex-Chancellor) Kwasi Kwarteng’s mini-Budget on 23 September unveiled “good news” proposals to help first time buyers by reducing Stamp Duty – but other elements of his plans, including speedily cancelled proposals to abolish the highest rate of tax altogether and keep corporation tax at 19% – sent the financial markets into a thoroughly “bad news” meltdown.

In a pretty major response to what was meant to be a “mini” Budget, the pound dropped to a 37year low, interest rates were hiked by 0.5 points to 2.25% and then by 0.75 points to 3%, the highest level since 2008, and panicked lenders pulled more than 300 mortgage deals off the market in a single night. Within days, the average two-year fixed rate mortgage deal that had stood at 2.34% at the start of December 2021 and 4.74% on the day of the Budget had climbed to 6.07% according to figures from Moneyfacts, adding an extra £547 a month to a £263,000 mortgage.

STAMP DUTY

Let’s start with the (possibly) good news – around 200,000 homebuyers a year will now pay no Stamp Duty Land Tax at all. The nil-rate band that was set at £125,000 has doubled to £250,000, which means most buyers in England will pay nothing on a home under that amount (those buying a second home or buy-to-let will still pay 3% extra on all bands). For first time buyers (joint purchasers must both be first time buyers), the nil rate band has risen from £300,000 to £425,000. To benefit from the reduced rate, the property must be worth less than £625,000 (previously it had to be below £500,000).

This can make a significant difference. For example, a first time buyer purchasing an average home in London at £543,500 (Land

EXPERT COMMENT

When the dust settles on the chaos in the mortgage market, the ground will have shifted, and xed rates will have risen signi cantly. The impact on buying power will mean some incredibly dif cult decisions for homebuyers, who could end up with smaller ambitions or horribly tight budgets. This is going to take a toll on the market. For some, this will push the home they want out of reach. A combination of rapidly rising prices, higher mortgage rates and a wider squeeze on their nances, will mean they just can’t stretch to higher mortgage payments. Even if they’re prepared to push their budget to the limit, their mortgage lender may have other ideas. Factoring all this into mortgage affordability calculations may mean they can’t nd anyone prepared to lend to them. Some will choose not to buy. Others will be able to boost their deposit by calling on family members to help balance the equation. And some will need to spend less – either by negotiating a price cut or reconsidering where they can afford to live – opting for somewhere smaller, in worse condition, or in a cheaper area.

Sarah Coles, Sarah Coles, Senior Personal Senior Personal Finance A nalyst, Finance A nalyst, Hargreaves Hargreaves Lansdown Lansdown

Registry Data July 2022) would previously have paid £17,175 Stamp Duty as the home would have been too expensive for First Time Buyer’s Relief. Under the new system they would pay £5,925, saving £11,250.

Expert reaction has been divided. David Hannah, Group Chairman of Cornerstone Tax, is largely positive: “The cut in Stamp Duty that’s been announced hopes to provide first time buyers with a better chance to get on the property ladder. With properties in the UK standing at the most unaffordable levels ever, this is a crucial step that will provide people with a muchneeded boost in terms of their spending power. Fundamentally, Stamp Duty is something which can delay the process of buying a house and add extra unforeseen costs for those who aren’t aware of it.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, is less convinced, noting that when Stamp Duty was first, temporarily, reduced for first time buyers the resulting surge in house prices completely wiped out the savings. “For those at the cheaper end of the market, the Stamp Duty cut may help close the gap. However, we’ll have to see whether boosting demand in this corner of the market will end up pushing up prices and unwinding any benefit from the changes in Stamp Duty,” she said.

MORTGAGES

The biggest shock was the effect the mini-Budget had on the mortgage market, with fixed rate deals climbing sharply in the aftermath. Sarah Coles explains why, “Fixed rate mortgages don’t just depend on the rate today, they also depend on rate expectations. The dramatic fall in the pound led to fears of inflation – because the price of anything that’s imported will rise. As a result, it led to expectations that the Bank of England would hike rates to try to bring it back down again.” In other words, lenders think base rates may continue to climb so are pricing their two-year deals accordingly.

At the time of writing, that means the cheapest mortgage deals on the market are variable rates such as trackers and discounted deals, with sub-3% still on offer. The risk, of course, is that over the coming months rates could continue to climb, with no ceiling on monthly payments for those on variable mortgages. Interestingly, however, five and 10-year fixed deals are significantly cheaper than two-year ones, with rates starting at 5.59%, which suggests experts are not anticipating rates going significantly higher for very long.

HOUSE PRICES

Will house prices plummet as a result of recent events? Well, it depends who you ask. City Analyst Roger Bootle is predicting a 20-25% drop in prices, while the Royal Institution of Chartered Surveyors (RICS) suggest a 10% fall. Others suggest more of a slowdown than a crash. “After such a long bull run we shouldn’t expect a quick drop in prices,” said Jack Roberts, CEO of home moving platform SlothMove. “Government measures, like extending the mortgage guarantee scheme to de-risk higher LTV mortgages, will mean it’s a correction, not a cliff edge.”

Gary Wright, co-CEO of payment technology firm flatfair, warns people to be careful of what they wish for, “Current renters and hopeful first time buyers should be wary of cheering on a crash in the housing market. Higher interest rates for buy-to-let landlords may well be passed on to tenants – and these same high rates will make mortgages unaffordable for many regardless.”

WHAT TO DO NOW?

If you are almost ready to buy, it will certainly pay to use a mortgage adviser or broker, as deals are changing on a daily if not hourly basis. If you aren’t quite at that point, then the key advice is to “keep calm and carry on” – with interest on savings the highest it has been in a decade, take care that your money is earning the most you can while you continue to save. And who knows, perhaps for the first time in a long time you won’t be constantly chasing rising house prices as you save for your deposit?

EXPERT COMMENT

The mini-Budget caused shockwaves throughout the economy and intervention by the Bank of England to counter these effects resulted in lenders pulling many xed-rate mortgage deals. Homebuyers are still coming to terms with the sudden leap in xed-rate mortgages, and it will be some time before we see the full impact. Many prospective buyers are rushing purchases through before their approved deal runs out, while others are seeing their hopes of buying fade before their eyes. The Government’s new Stamp Duty changes will be enticing to rst time buyers on the surface, however, being able to take advantage of the change will largely depend on whether they can secure a mortgage deal. The Stamp Duty cut may well have the effect of mitigating spiking nance costs, but question marks remain over how high interest rates will climb. While getting a good mortgage deal has become signi cantly harder, a crash in the market is not as likely as some economists are forecasting, as estate agents are still seeing stock shortages in many areas of the country, something which has supported elevated house prices throughout the boom.

Iain McKenzie, CEO, The Guild of Property Professionals