Just a few days after Kwarteng announced his ‘Growth Plan’ policies to create stamp duty-free investment zones and scrap corporation tax, the value of the pound dropped, the cost of bond yields surged, and uncertainty forced lenders to remove numerous mortgage products from the market.
A year on from the turbulent period, Mortgage Solutions asks advisers what the impact of the mini Budget was and what was learned from the event.
Housing market growth was coming to an end
Brokers said the current state of the market was not entirely down to the mini Budget, but it did accelerate its course.
Elliott Culley, director at Switch Mortgage Finance, said: “To blame solely the mini Budget for the current state of the market would be unfair. Interest rates had started to tick upward and the main contribution of the mini Budget was to accelerate the speed of the rate increases.
“Inflation was mainly caused by the spending during Covid as well as the war in Ukraine.”
CPI inflation had fallen slightly from 10.1 per cent in July to 9.9 per cent in August. By September it had gone back up to 10.1 per cent.
Mortgage pricing had also started to creep up as in August 2022, the average two-year fixed rate had reached a nine-year high of 4.09 per cent, while the average five-year fixed rate had come to 4.24 per cent.
At the start of August and just 10 days before the mini Budget, Moneyfacts data showed the average two-year fixed rate had risen further to 4.24 per cent while the five-year fixed average ticked up to 4.33 per cent.
At the time, there was also a notable decline in the number of available mortgage products on the market as lenders adjusted their offering.
Steven Hargreaves, mortgage and protection adviser at The Mortgage Co, said: “We all knew the housing market could not continue increasing at the same rate year after year, however, nobody forecasted the speed of the changes, less than a week after the mini Budget.”
In the days after Kwarteng’s announcement, nearly 300 mortgages had been removed from sale as the pricing for remaining options surged in response to rising swap rates.
An unsettled time
Although it was acknowledged that the mini Budget did not cause all the mortgage and housing markets’ problems, brokers said the lasting effect of the turmoil it contributed to was still being felt.
Imogen Sporle, managing director of Finanze Property at Finanze, said it did not feel like a year since the statement and the memory of “traumatic financial times” was still fresh in her mind.
Sporle added: “To say this was a stressful time is putting it lightly. Rates were being pulled out from beneath us daily as many lenders withdrew their products with no notice at all. We were trying desperately to get clients’ applications to lenders to lock in the rates before any further sudden rate rises or total withdrawals.”
She also said it caused a shift in borrower behaviour and the mortgage terms they were selecting.
“At first, clients wanted to lock the rates in for five years as rates were historically low and we knew they would not be this low again in quite some time. However, as the base rate rose and rose, I found clients became – and still are – more keen now on a two-year fixed, optimistic that rates may drop in the coming two years,” Sporle added.
Stephen Perkins, managing director at Yellow Brick Mortgages, also placed some responsibility on the Bank of England’s subsequent base rate rises.
He said: “The economy is still suffering from the ill-fated mini Budget. Whilst inflation was still going to cause increased mortgage rates, from the Bank of England’s reckless base rate rises, it seems that the Bank of England saw the economy on the floor and decided to continue kicking it.”
The central bank has been criticised for being slow to react to rising inflation which first exceeded its two per cent target in April 2021, when it rose to 2.1 per cent. The base rate was held at its record low of 0.1 per cent until December of that year which saw the first increase to 0.25 per cent. During that month, inflation had jumped to 5.1 per cent – its highest point in 10 years.
The day before the mini Budget, the base rate had risen to 2.25 per cent. At the central bank’s next meeting in November, the Monetary Policy Committee (MPC) put the base rate up to three per cent.
Impact still felt
Hargreaves said: “Since Liz Truss’s budget 12 months ago, it has been challenging, with many lenders changing rates and criteria with little or no notice, which is frustrating.
“We have worked closer than ever with existing clients, arranging remortgages and product transfers much earlier than we have ever done in the past, as rates have dropped amending these weekly, ensuring clients are on the best rates and mitigating increases where possible.
“The purchase market is still being severely squeezed, the importance of having an existing client bank has never been so important, and ensuring you provide those clients with value for money and transparency is essential.
“The only constant in this business is change, and we do not see an end to it any time soon.”
Culley added: “We are still feeling the effects of this today and will do so for the rest of 2023 as well as some of 2024. Mortgage holders have proved resilient to the changes and hopefully, more will now keep on top of their finances as a certain few have been stung by being reactive rather than proactive.”
The economy has eased for the most part, with inflation now at 6.7 per cent and average mortgage rates circling five per cent.
The former Prime Minister Liz Truss has since defended her policies and said the UK’s economy would be on track to be stronger by two per cent had her measures remained in place.
Amit Patel, adviser at Trinity Finance, said: “What planet is Liz Truss living on? The audacity to say she regrets nothing from her brief time as PM beggars’ belief, at no point did she apologise for her failings whilst in office instead tried to defend the indefensible.
“The facts speak for themselves the pound fell to a record low against the dollar, inflation soared to a 41-year high of 11.1 per cent, and the Bank of England also hiked interest rates to compensate. An ill-thought-out policy has had huge implications on the lives of millions of people.”
Karen Noye, mortgage expert at Quilter, said the 12 months since the mini Budget had been “nothing short of mayhem” for the mortgage market.
“Persistently high rates have piled continuous pressure on those with mortgages and have even forced some to sell up. A great number of people have had their plans to take the first step onto the property ladder or to move home scuppered, and those that have pushed ahead have been forced to stomach astronomically higher costs to do so,” she added.
Noye said the market had been resilient despite the challenges.
She added: “Going forward, a more stable interest rate environment, even if high, could bring some predictability. A more stable mortgage rate landscape can help these buyers budget better and not have to deal with unpredictable rate spikes that can disrupt financial plans.”
