The great news is that the Bank of England has reduced the headline interest rate for the second time in the current cycle by another 0.25% to 4.75%. However, the decision was made immediately after Labour's first Budget for 14 years. So what impact, will the choices made and direction taken have on the likelihood and speed of future cuts?
From a property perspective, Rachel Reeves' first budget provided a mixed outcome. Although the freeze on Capital Gains Tax (CGT) for property sales (applies to second properties or more) at 18% and 24% will be taken positively by landlords, the increase of Stamp Duty (SDLT) on second properties from 3% to 5% will be another hurdle and is only likely to put more upward pressure on rents. Corporation Tax, however, has been frozen for the life of the Parliament at 25% which will be taken positively by professional landlords with their property ownership in a company set up. First-time buyers (FTBs) hoping for an extension to the SDLT holiday will now face the challenge of the tax-free banding reducing again from £425K to £300K at the end of March 2025.
For interest rates and therefore mortgage rates, the repercussions of the Budget may be less obvious, as there was a heavy focus on spending and taxes. Concerning tax, the biggest losers are not the individual, but corporate Britain and the increase in minimum wages and National Insurance contributions, which will hit some businesses hard with tight margins. The costs are likely to be passed on to consumers in some way and build pressure on inflation in the future. These measures were nowhere what many expected, with relatively small increases to non-property CGT and threshold changes to Inheritance Tax.
On the spending side, changing the fiscal rules that the government uses to govern its spending and allowing additional borrowing to spend on infrastructure projects, in theory, freed up billions of pounds to aid the NHS and education departments, which are in desperate need. The problem with this is that the bond markets in the City, who are still nervous following the Liz Truss mini-budget in 2022, are concerned that the increase in national debt and the potential for more borrowing in the future is risky. This can become a self-fulfilling prophecy as the bond interest rates rise (bonds or gilts are how the government raises money when they borrow from the City). If this is perceived to be riskier, the government must pay out at a higher rate to convince investors to buy them. This, in turn, makes government borrowing more expensive and translates into the interest-setting decisions made by the Bank of England Monetary Policy Committee.
All this impacts SWAPs (the futures market for interest rates) where the impact of the above is a view that the more expensive borrowing slows the ability of the Bank of England to reduce interest rates. This relates to forecasts changing to no more cuts this year and a reduction in drops in 2025 from four to two, with interest rates settling around 4.25% by this time next year. These forecasts are how fixed-rate mortgages are priced. The forecast for where rates are in two years helps price 2-year fixed rate products and where they might be in five years translates into a 5-years fixed rate. So, this means mortgage rates are unlikely to be any cheaper in the short term and could even edge up a little.
However, the one thing we know about the market is that they are constantly changing and reacting, positively and negatively. The one thing that has stayed constant throughout is that people have wanted and needed to move house. If you would like to find out how the above might impact your house-purchasing decisions and potentially lock in a great rate now to minimise your risk, speak to one of our experts at Capital Private Finance.
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