It is one year since former prime minister Liz Truss’s ‘Mini-Budget’ created a month of madness in the mortgage sector. The raft of unfunded tax cuts caused turmoil across stock and currency markets.
With the value of the pound tanking and gilt yields spiking, it became clear that interest rates would have to rise, and rise quickly, which caused immediate pricing issues for lenders.
L&C Mortgages associate director of communications David Hollingworth describes the budget as having sent “shockwaves” through what was already a more volatile market after a series of interest rate rises.
The impact on rental stress testing has been the main challenge since
“Banks and building societies went into a frenzy of re-pricing,” he says, “with fixed-rate mortgages being pulled and some lenders temporarily withdrawing altogether.”
At one point, almost 1,000 products were withdrawn in one day. New deals, where available, were offered at significantly higher rates. Many of these were short-lived, being withdrawn in just hours as borrowers scrabbled to snap up what deals they could before rates jumped again.
The immediate impact of the Mini-Budget can be seen in rate movements over this period. L&C’s remortgage tracker shows the best remortgage rates from the top 10 lenders in the UK. At the start of September 2022, the average two-year fix was 3.66%. By the start of October — 10 days after the budget — this had jumped to 5.24%. By the beginning of November it stood at 5.9% — an increase of over 2 percentage points in less than two months.
There were similar rises in the cost of five-year fixes and buy-to-let (BTL) products.
Lenders are returning products to the market and a wider range of solutions is available for borrowers once again
Mortgages for Business development director Jeni Browne points out that, although politicians subsequently ditched almost every proposal in the Mini-Budget, this did not mean the mortgage market reverted to the position it had been in at the start of September. Higher rates and fewer products remained an ongoing problem.
JB Mortgages broker James Bull says the last three months of 2022 were “an absolute disaster for the mortgage industry” after what had been a strong year thus far.
This is a sentiment shared by many and summed up by South Coast Mortgage Services director Gareth Davies.
“It created market uncertainty, spooked lenders and put the fear of God into many customers,” he says.
Longer-term impact?
But 12 months on there is less agreement on the longer-term impact of this fiscal event. Interest rates were already rising in 2022 as inflation became a more persistent problem in the UK economy. Given the onward trajectory of rate rises into 2023, how much difference has the Truss Mini-Budget made to the mortgage market today, at least in terms of pricing?
Things are coming back together again. We have had an extremely busy month
Private Finance technical director Chris Sykes says: “Would we be in the same situation now if the budget hadn’t happened at all? I think we would probably be here or hereabouts, certainly in terms of rate.”
MT Finance director Tomer Aboody says rising mortgage costs have been “inevitable” given global inflationary pressures stoked by Covid and the invasion of Ukraine. But he says the Mini-Budget affected the speed of these rate rises.
Browne agrees, adding that the journey to today’s mortgage market might have been smoother without the interjection of Truss’s budget.
“Had we continued on the more measured trajectory we were seeing pre-Mini-Budget, it would have been much easier for people to plan their finances, make arrangements and get organised,” she says.
Without question, landlords have increased rents faster and higher than they would’ve done had the Mini-Budget not happened
Consumer confidence has been affected. After a decade of record-low interest rates, many borrowers might have realised, in theory at least, that rates would go up at some point. But the starkness of calculating what this sudden jump in rates will mean for monthly repayments the next time they remortgage has been a shock for many, particularly at a time of rising food and fuel prices. This drop in confidence has helped put a brake on activity in the housing market, which has fed in to price drops.
Many brokers point out that, although the market has subsequently recovered from the Mini-Budget in terms of more stable pricing, consumer confidence does not bounce back quite so easily — particularly as further rate rises remain a possibility.
But brokers don’t lay the blame for this disorderly market entirely at the doors of the Truss administration. Many also point to the action, or lack of it, taken by the Bank of England (BoE) when it became clear that inflation was becoming a problem.
Staton Mortgages director Mike Staton says: “I don’t believe we reacted quickly or harshly enough. The US quickly upped rates, which saw a very quick reduction in inflation, while we slowly turned the tap on, prolonging the agony of homeowners throughout the UK.”
A gradual return in confidence about the UK economy has also had a positive knock-on effect to the mortgage market
Browne also points out that mortgage rates began to revert to pre-budget levels at the start of 2023, before the markets faced similar gyrations in the spring as forecasts that inflation would start to fall proved wide of the mark. She adds that perhaps the transition from a low interest rate environment to a higher one is rarely a smooth journey.
Buy-to-let crisis
In the immediate aftermath of the budget, much of the focus was on the residential sector. But brokers report that the long-term effect has taken place in the BTL market.
Browne says: “While sky-rocketing interest rates made the headlines, the knock-on impact on rental stress testing has been the main challenge since. These changes have significantly reduced the amount of money landlords can borrow per pound of rent, which has restricted their remortgaging options.”
This is an ongoing problem, she adds, which is contributing to supply issues in the rental market and to rising rents.
I don’t believe we reacted quickly or harshly enough to rising inflation
Davies agrees that BTL has been the hardest-hit sector, saying: “The stress rates that are now used make it inconceivable for a swathe of landlords to either refinance or extend their portfolio without having serious equity to play with.
“Many landlords have had no choice but to increase rents to try and cushion the blow. Without question, they have increased rents faster and higher than they would’ve done had the budget not happened.”
Looking ahead
It has been a turbulent year in the mortgage market, but many in the industry say there are now reasons to be cheerful when looking ahead to the next 12 months.
The Mini-Budget may have derailed the market in the short term but it does not appear to have done lasting damage; and, with inflation ticking downwards and the BoE finally pausing interest rate rises — after 14 successive hikes — brokers and lenders are hoping for more stability.
Had we continued on the more measured trajectory we were seeing pre-Mini-Budget, it would have been much easier for people to plan their finances
Mortgages for Actors founder Austyn Johnson says: “Things are coming back together again. We have had an extremely busy month where a few of our clients were waiting for things to settle before moving forward. That’s happened now and it’s bringing confidence back to the property market. Long may it last.”
Saffron for Intermediaries head of business development Tony Hall says: “A gradual return in confidence about the UK economy has also had a positive knock-on effect to the mortgage market. Compared to the first six months following the Mini-Budget, lenders are returning products to the market and a wider range of solutions is available for borrowers once again.”
This doesn’t mean it is plain sailing ahead. Yellow Brick Mortgages managing director Stephen Perkins says that, although we are through the worst of the market instability, “the longer-term implications of decade-high interest rates and a cost-of-living squeeze are only now starting to be felt by most households”.
Interest rates will not drop significantly anytime soon, and Perkins warns that the mortgage market faces an ongoing affordability challenge as many thousands more households move off low-cost fixed-rate deals in the next few years.
If the Mini-Budget hadn’t happened, we would probably be here or hereabouts
Given this background, brokers and lenders hope politicians have learned one important lesson from the Mini-Budget: short-sighted policy changes can make a difficult economic situation significantly worse.
With less than a month until this year’s Autumn Statement, few in the industry are expecting notable giveaways to help the BTL or residential market. But most are hoping for a ‘neutral’ budget that will at least provide some stability and will support further recovery across the mortgage market.
This article featured in the October 2023 edition of MS.
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