The proposed unfunded tax cuts caused widespread instability in the financial markets, causing the pound to reach an all-time low, instability in swap rates, warnings from the IMF and Moody’s along with the Bank of England launching a bond buying programme over pensions run worries.
In the mortgage market there were mass lender product withdrawals and repricing, leading to confusion and frustration from brokers. Brokers urged potential borrowers to act quickly to get ahead of repricing, and reported high demand from clients paying to leave fixed rates.
Six months on from the fiscal event Mortgage Solutions asked a range of trade bodies and brokers, whether the mini Budget is still influencing the market and whether this will be for the long-term.
Mortgage approvals and houses prices down but product choice has returned
Paul Broadhead, head of mortgages and housing at the Building Societies Association, said it had been a “turbulent six months in the mortgage market”.
He said this could partially be laid at the feet of the mini Budget but other factors like inflation and the cost of living crisis also had to be considered.
Broadhead said since then, figures from Moneyfacts showed product choice had nearly doubled to around 4,327 options, and rates for two and five-year fixed rates had fallen back to their lowest points in six months after an initial spike.
He added that the vast majority of lenders who had withdrawn products had returned by the end of the year, and the mortgage market is “again competitive”.
Kate Pender, head of client solutions at Target Group, said it had seen a steady reduction in house prices and mortgage approvals were lower than they were pre-pandemic.
She added that lenders were starting to see an increase in arrears and this was forecast to grow. She said the situation was “likely to worsen” as customers roll off fixed rates onto new rates or standard variable rates (SVR) that could be double what they previously paid.
“Whilst the current financial forecasts appear to be more promising, the mortgage industry may still not have experienced the full impact. We have a unique situation where employment levels are high, yet working customers are unable to make their mortgage payments, a situation which will deteriorate as they switch interest rates.
“Therefore, it may be Q3 before the mortgage market experiences the full impact, almost a year after the mini Budget. This situation could take a number of years to unwind with some financial analysts suggesting it could be 2028,” she added.
Nicholas Mendes, mortgage technical manager at John Charcol, said the long-term impact of mini Budget “remains to be seen”.
He noted that the rise in rates had meant the “demand for new mortgages to fund purchases and those looking to refinance meant demand fell suddenly”.
“House prices have fallen in response to the decline in demand and many put plans on hold while the market remained unstable.
“While we expect to see prospective buyers waiting for a larger correction in house prices and fall in mortgage rates, there seems to be a change in attitude recently amongst buyers that if there is an opportunity, to still go for it while demand is dampened,” he added.
Buy-to-let market still ‘reeling’ from mini Budget
Jo Breeden, managing director of Crystal Specialist Finance, said the buy-to-let market was still “reeling” from the mini Budget due to interest coverage ratio (ICR) struggles.
He noted that rental incomes were struggling to “keep pace” with rising mortgage repayments.
“Portfolio landlords are being hit on a number of fronts at the moment from increasing regulatory pressures, to corporation tax rising to 25 per cent from April.
“Increasing numbers of portfolio landlords are now looking at conversion to houses in multiple occupation (HMO) or mixing the use of their commercial properties as a way to increase their yields,” he added.
Mendes agreed and said criteria had started to “ease slightly” but rates had not fallen as quickly as hoped, affecting ICRs.
He said this had led to landlords not being able to raise funds for remortgage on a like-for-like basis or restricted from accessing lenders product transfer rates.
Mendes noted that some lenders had brought out higher arrangement fees to overcome the ICR limitations, as the lender can offset the reduction in the fixed rate and make the ICR more “favourable”.
“This allows the lender to still make a profit and landlord to raise more with the lender,” he added.
Breeden agreed that higher arrangement fees were becoming more common and added that he had seen an increase in interest in bridging.
He said around a third of his firm’s weekly enquiries were from brokers looking for bridging solutions.
“Bridging could be the ideal solution in many scenarios as the pricing is competitive, giving many borrowers breathing space as they wait for rates to settle further. Exits are timed to suit the borrower and don’t incur early repayment charges (ERCs). Plus, adverse credit isn’t a barrier to borrow,” Breeden added.
Residential ‘Truss premium’ starting to unwind
On the residential side, Mendes said fixed rates had been coming down more quickly due to “stability within the UK market”.
He said the market had reacted positively to the Bank of England’s decision to increase the base rate to 4.25 per cent in order to bring inflation down.
Swap rates, which dictate mortgage pricing, have also dropped to their lowest since early February according to Mendes.
“Moving forward, with lower lending volumes expected, and swaps at a healthy level we could see lenders competing for business again which is positive news for homeowners,” he noted.
Mendes said affordability was a key issue for prospective homeowners, with lenders taking higher rates and living costs into account. He said these were expected to come down “having reached the peak”.
Breeden agreed that the market was “ starting to see the end” of the mini Budget impact as the “Truss premium” was “disappearing”.
However, he noted that there were around 1.4 million homeowners coming off fixed terms deals with year, with more than half on deals under two per cent.
“An interest rate shock of just two per cent will add nearly £225 per month to a £200,000, 25-year mortgage. Given the ongoing cost of living crisis this could see a rise in repossessions, downsizing or an increased shift to the rental market, where tenant demand already outstrips supply,” Breeden noted.
One to two per cent mortgages will ‘never return’
Kate Davies, executive director of the Intermediary Mortgage Lenders Association, noted that rates had already begun to go up from low sub-one per cent levels, but the mini Budget created a “bumpier transition to a rising rate environment than would be been ideal”.
She said the market had started to settle more, and rates would likely stabilise at a “’new normal’ which is in fact back to what we used to regard as ‘normal’.”
Davies continued: “Long-term it’s hard to see mortgage rates returning to the super-low levels that we’d rather got used to prior to last year’s ‘not-so-mini-Budget’, but that’s not necessarily a bad thing. Rates were always only ever going to go up from such low levels and we were already seeing inflation and the base rate climbing throughout 2022.”
Breeden agreed and said fixed term deals would start to consolidate as lenders compete for business but the circa one per cent mortgage pricing in the residential space and close to two per cent in the buy-to-let space “will never return”.
Mini Budget’s major impact is damage to consumer confidence
David Hollingworth, associate director for communication at L&C Mortgages, said one of the major consequences of the mini Budget was the “damage done to consumer confidence”.
“The last quarter of 2022 was so much quieter as borrowers simply couldn’t make sense of what was going on. Potential home movers shelved their plans and called a halt on property searches and even remortgage customers gave up when rates rocketed,” he noted.
Hollingworth said rates had “subsided substantially” but “disengaged borrowers” would “take time to come back to the market”.
“Some will be hoping that the downward trajectory will continue and head closer to the rates that borrowers have been used to in recent years. It will take time for a level to be found but the more palatable rates that are now on offer coupled with base rate nearing a peak should help consumers re-adjust” he noted.
Broadhead agreed that the longer-term effect of the mini Budget would be “psychological”.
“I am not sure that many people could have predicted the speed, depth and breadth of the market response. Confidence in the government was certainly dented and it is imperative that we continue to see competence based on knowledge from those now in power.
“Industry managed the turbulence well in my view and has basically just got on with it since – but what happened will remain in our memories for a long time and the laser focus on swap rates won’t stop – we saw evidence of this as some fixed rates fell at the same time as the Monetary Policy Committee increased the base rate last week,” he noted.
