The UK’s new chancellor Jeremy Hunt has reversed nearly all plans previously announced in Kwasi Kwarteng’s mini-budget. The tax trimming measures including the removal of the top rate of tax for highest earners were a catalyst for the weakening of the pound.
Just days after the mini-budget statement, the so-called Great British Pound slumped to an all time low. Market confidence wavered and foreign investment, which the UK’s economy relies on for an 8% boost per year, began to disappear.
So what now? Jeremy Hunt has stepped in to clear up the short-lived legacy of Kwasi Kwarteng but will his decision to reverse plans create stability for the 2 million mortgage customers whose fixed-rate deals will be coming to an end by 2023? Can they rely on interest rates to settle down and will first-time buyers ever get a break?
The most important “objective” for the UK at the moment is “stability”, says Jeremy Hunt. We shall see.
What mini-budget plans has Jeremy Hunt thrown out?
The removal of the top rate of tax for highest earners? Gone.
Abolishing planned corporation tax increase? Gone.
Cut to the basic rate of income tax? Gone.
Help with energy bills? Gone after April 2023.
A planned 1.25% increase to income tax on dividends? Gone.
VAT-free shopping for overseas tourists? Gone.
Is anything from the mini-budget staying?
Reversal of national insurance hike? Staying.
Stamp Duty changes? Staying.
The scrap on the cap on banker’s bonuses. Oh, that’s staying too.
National Insurance on earnings over £12,570 will drop to 12%
That’s a small relief for some though the savings are arguably dismal for the people who need it most. For anyone hoping to squirrel away the savings made from the National Insurance cut, perhaps to pay for the rise in energy costs or maybe even put aside towards a deposit for a first home, see the table below:
Savings made from NI cut
£30 a year
£93 a year
£155 a year
£218 a year
£280 a year
£343 a year
£405 a year
£468 a year
Will the FTB Stamp Duty changes help the housing market?
The nil-rate band for first-time buyers (FTBs) rose from £300,000 to £425,000 on purchases of up to £625,000 in August 2022. While these changes will remain in place until further notice, will it encourage hopeful buyers to invest in property? With a shortage of housing, it might not be encouragement that’s needed but a realistic route for homeownership that doesn’t leave a new buyer broke at the end of each month.
While previous Stamp Duty changes during the Coronavirus lockdown helped to boost sales, the increased demand caused by those wanting to meet the Stamp Duty deadline pushed up prices and pushed out first-time buyers that couldn’t compete with seasoned second time purchasers that had equity to play with. Interest rates were historically low back then too, while now, first-time buyers may need to pay as much as 6.5% in interest for their mortgage.
The increased mortgage repayments as well as increased property prices have created an issue when it comes to proving they can afford a loan of such magnitude. Mortgage lenders have pulled their products from the market, meaning only those able to meet the strenuous affordability criteria can qualify for a mortgage.
So will the Stamp Duty changes help first-time buyers purchase in 2023?
If the markets settle, demand for property decreases and has a knock on effect on property price and interest rates come down, then maybe.
If the above changes were to happen, first-time buyers could keep more of their money to put towards their deposit, decreasing the amount of mortgage needed and therefore decreasing their monthly mortgage repayments.
What are the new Stamp Duty changes for first-time buyers?
SDLT Rate for first-time buyers
£0 - £425,000
£425,001 - £625,000
£625,001 - £925,000
£925,001 - £1,500,000
Homemovers can also benefit from the doubling of the nil-rate Stamp Duty band from £125,000 to £250,000
This change could allow as many as 200,000 more people each year to buy property without paying any Stamp Duty. For a buyer that already owns property, this could be great news as the cost of moving is significantly reduced, making it easier to move into the next home while freeing up their older, potentially cheaper property for first-time buyers.
That being said, buyers whether experienced or first-timers should be aware that savings they make through the Stamp Duty cut could be cancelled out through elevated mortgage repayments if borrowing rates continue to rise.
SDLT Rate for homemovers
£0 - £250,000
£250,001 - £925,000
£925,001 - £1,500,000
No U-turn on scrapping bankers’ bonus cap
Why is this the last policy standing in this disastrous mini-budget?” Questioned Rachel Reeves, labour MP. According to The Guardian, bankers have already said the abolition of the cap, with which Jeremy Hunt intends to proceed, will make little difference to their pay. Instead, it could damage mortgage lenders’ reputations with the public during a cost of living crisis.
The current cap which is soon to be abolished was imposed by the EU and limits payouts to two times bankers’ salaries. According to Jeremy Hunt, it “didn’t work” because the policy has just increased fixed salaries to make up for lower bonuses.
Referring to the 45p rate of tax that he plans to maintain on higher earnings, Hunt commented that the government would get “more tax from rich bankers with the policy we now have”.
Will the Bank of England still hike interest rates?
While the U-turn on Kwasi Kwarteng’s mini budget may ease pressure for the pound if investor’s confidence is boosted by new stability, the Bank of England is still likely to increase the base rate.
The central bank’s base rate - which influences other borrowing costs - is predicted to rise from 2.25% to 3% in November 2022, but some economists think it could jump to as high as 3.25%.
If true, this could result in mortgage lenders increasing their rates. The average 2 year fix is priced at more than 6%, compared with 4.74% on the day of the mini-budget.
The Bank of England has bumped its base rate up seven times since December 2021 to tame the UK’s soaring inflation, so far with little effect. As of October 2022, the Consumer Price Index (CPI) reports inflation rates have screamed to a 40-year high of 10.1%.
Therefore, it’s likely that the Bank of England will increase the base rate again soon, affecting more homeowners whose fixed-rate deals are coming to an end, as well as those on variable rates that follow and fluctuate with the central bank’s rate changes.
Anyone on a tracker mortgage or a fixed-rate mortgage can get advice
Borrowers are likely to suffer further increases to their monthly mortgage repayments, unless their rate is fixed for a substantial amount of time. Remortgaging or transferring a mortgage deal to a lower rate with the same lender could offer a solution, though it’s vital that before any decision to switch deals is made, accurate and honest advice is sought.
Moving to a lower rate can save property owners money but there are fees to consider that could affect whether a mortgage move is worth it.
Watch out for exit fees, early repayment charges or over repayment charges. These are usually charged as a percentage of the outstanding mortgage balance, so if you owe a significant portion of your mortgage, you’ll likely be charged a good chunk of money, depending on your lender and their terms.
Check with a mortgage broker so you know exactly how much it would cost you to switch mortgages and whether you’re eligible to do so with a new lender or your current lender. If you can move to a better deal with the lender you’re already with, you might be able to avoid paying exit fees altogether and if you’re out of your fixed-rate mortgage period, the same could apply.