Budget fallout hits mortgages, as lenders increase rates

Market reaction to Rachel Reeves’ Budget is now feeding through to mortgage business and an expectation that interest rates may have to remain a little higher for longer than previously anticipated is pushing up costs for lenders.

This volatility has initially been most evident in rate withdrawals from smaller and more specialist lenders, according to David Hollingworth (pictured left), director at broker L&C Mortgages, but it is now also impacting bigger, mainstream lenders.

Hollingworth points to fixed rate increases from Skipton Building Society and Coventry Building Society, taking effect today and tomorrow respectively.

“It’s confusing times for mortgage borrowers when expectation is for a base rate cut next week, but fixed rates look set to rise,” said Hollingworth. “If market rates remain at current levels, it looks inevitable that more lenders will have to rethink their rates. 

“This isn’t the radical spike in rates that have blighted mortgage rates in the last couple of years, but if funding costs don’t ease, the sub 4% five-year fixed rates that we’ve become used to in recent months could be under threat. Borrowers currently considering a fixed rate option should move quickly to secure a deal as we’re seeing some rates withdraw with very little notice.”

The impact on swap rates is key

Ben Thompson (pictured right), deputy CEO of Mortgage Advice Bureau, maintains that more will become known in the following few weeks.

“One of the major unknowns now is how swap rates and, in turn, mortgage costs will be impacted once the initial post-budget reaction settles,” he said. “While swap rates have risen, it’s best to assess the full impact in a few weeks’ time, after the markets have stabilised. A period of adjustment will give us a better picture of whether this is temporary or long-term. Certainty is always helpful, even when some of the announcements may not be to everyone’s liking or leave gaps in support.

“There is potential for stabilisation once the initial market reactions to the budget fade. Once we see greater rate stability, the market will be in a better position to respond, allowing for a sustainable pickup and a more predictable market for borrowers.”

Housing market transactions remain below long-term averages, even as mortgage rates have decreased slightly, Thompson suggests.  

“If this momentum continues, the market is likely to progress in a sustainable way, recovering at a manageable pace,” he said. “Looking ahead 12 months, there is reasonable optimism that the market will continue to strengthen, supported by fundamentals such as wage growth, stable employment, and high rental costs, which all drive buyer demand.”

Reflecting on last week’s Budget, Thompson considers a lack of specific support for first-time buyers disappointing.

“There is likely an expectation that this issue will be addressed through additional tax measures targeting landlords and second-home buyers and, in the long term, through more housing development,” he said, noting that Capital Gains Tax on disposal of additional properties and the increasing of Stamp Duty on second homes, could throw first time buyers a property lifeline. 

“Any negatives may be offset by a release of pent-up demand, hopefully allowing the market to continue its recovery. With real wage growth, lower inflation, high employment, and the high cost of renting still in play, the market has a tailwind that can drive it forward.”

Read more: Non-traditional workers want government to boost housing support

The importance of housing supply

Thompson acknowledges a noticeable government shift towards stimulating housing supply, which he believes is the right approach to address the housing crisis. More direct action is needed to assist hundreds of thousands of reluctant renters who desperately want to own their homes but struggle to do so, he said.

“Currently, stamp duty levels remain high, which significantly impedes market mobility and makes it harder for buyers to navigate this critical housing market,” commented Thompson. “The government has taken some steps, but there is still a gap to be filled in providing short-term relief for home buyers and stimulating a more balanced market.

“For those who have been holding off on buying, now is a good time to reconsider. Eventually, house prices will begin to rise again, and that is an important consideration in addition to current mortgage rates. No-one wants to miss out on potential house price growth, so the opportunity may be now.”