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The UK has a new Prime Minister – what does this mean for you?

In the short time since our last blog, there has been more disruption to the government, the economy and the mortgage market.

With lots of changes taking place in such a short space of time, in this blog we’ll be bringing you up to date with everything that’s happened, and how the latest events might affect you as a home owner.

Let’s go through it…

1. A new Chancellor, changes to the mini-budget, and a new Prime Minister.

On 14 October, after just 38 days in the job, Chancellor Kwasi Kwarteng was sacked. The markets didn’t respond well to his mini-budget and the unfunded tax cuts he proposed – the value of the pound fell to its lowest point in years and, as we covered in the last blog, several mortgage lenders pulled their products from the market.

Kwarteng was replaced by Jeremy Hunt, who had previously held the roles of foreign secretary and health secretary, but who had not been in a Cabinet position since 2019. Hunt immediately scrapped almost all of Kwarteng’s tax cuts. Hunt also scaled back the energy price guarantee, which would fix the cost of the average annual household energy bill at £2500 – it was originally intended to last for the next 2 years, but will now end in April 2023.

It’s not yet known what Hunt will do in the long term – he’s set to announce his own economic plan for the country on 31 October (but we’ll talk a bit more about that later).

This immediate reversal to the mini-budget was seen by many political experts as a sign that  Liz Truss’s position in government was under threat and that she wouldn’t last much longer as Prime Minister.

The experts were right. On 20 October, Truss resigned as Prime Minister, after just 45 days in office, making her the shortest serving PM in history. Her resignation sparked another Tory leadership race – which lasted only 4 days – and was won by former Chancellor Rishi Sunak.

On 25 October, Sunak met with King Charles and became the new Prime Minister (the country’s third in 7 weeks).

There wasn’t just turmoil in the government. In the month since the mini-budget, inflation rose to just over 10%, with the Bank of England expected to raise interest rates yet again in November, in an attempt to drive it down.

The cost of living crisis has also shown no sign of getting any better, with food prices rising, reports of people having to make the choice between heating their homes or feeding their families, and the FCA estimating that 7.8 million people in the UK are struggling to pay their bills.

All in all, it’s an uncertain and unsettling time for anyone living in the UK.

2. What has this meant for the mortgage market?

On the day of Liz Truss’s resignation, mortgage rates were still rising. The rate on an average 2 year fix rate climbed to 6.65%, while a typical 5 year fix leapt to 6.51%.

Research by Compare The Market revealed that 55% of home owners are coming to the end of their fixed rate deals in the next 3 years and that 89% of them are worried that rising mortgage rates will mean that they will struggle to pay their household bills. These customers are likely to face an increase in their payments, even if they re-mortgage onto a new fixed-rate deal.

This worry amongst home owners appears to be backed up by the findings of the Bank of England’s credit conditions survey. The survey showed that defaults on mortgages had risen between July and September and they expected them to go up again in the remaining months of 2022, as the cost of living continues to take its toll.

The survey also expected for defaults on unsecured debt, like personal loans and credit cards, to also rise.

Why does the Bank think this is this happening? The rise in the cost of living and mortgage interest rates means that many households are now having to put a higher percentage of their income – as much as 70%  –  towards mortgage payments, household bills and essential items. When the percentage of income being spent on bills and essentials gets to  this level, it doesn’t leave much room for “financial shocks” like unexpected bills, emergencies or other life events that have a significant impact, such as bereavement, divorce, or redundancy.

Industry commentators seem split on what will happen to mortgage rates – some believe that rates will start to fall as stability in the government returns, whereas others believe it will be a long time before they start to come down.

Mortgage rates falling does seems unlikely – at least in the short term – given the rate of inflation. The way the Bank of England fights inflation is to raise interest rates, to discourage spending and borrowing, and therefore bring the prices back down – so while inflation is so high, it’s likely that mortgage rates will be too.

3. What has this meant for the housing market?

Amongst all the proposals and reversals, there was some good news for house buyers in the mini-budget. One of the few things the new Chancellor kept was the changes to the Stamp Duty threshold, which was raised to £250,000. The threshold for first time buyers was raised even further to £425,000.

Good news, indeed – although with the rising mortgage rates, it’s not clear how people looking for a new home will be able benefit from the changes to Stamp Duty, if they’re unable to afford a mortgage.

Research by the Royal Institute of Chartered Surveyors (RICS) revealed that new enquiries from house buyers had fallen in September, for the fifth month in a row. This slowdown is an indication that potential buyers have become more cautious about taking on such a big financial commitment. RICS went on to warn that rising mortgage rates would drive house prices down in the coming months.

4. What could the new Prime Minister do?

Rishi Sunak gave his first speech as Prime Minister on 25 October. He stated that the UK faced a “profound economic crisis” and promised to fix the mistakes made by Liz Truss. But how will he do that?

His first task as Prime Minister will be to assemble a new Cabinet. Remember we said we’d talk a bit more about how Jeremy Hunt is due to outline his economic plan on 31 October? Well, before he does that, he has to keep his job as Chancellor – although it’s expected that he will, Sunak hasn’t made any promises to keep him on. Potential replacements include former Chancellor Sajid Javid, and former Tory leadership contender Kemi Badenoch – this could mean more changes to the UK’s economic plan.

If Hunt does stay on, then he’s already hinted at cuts to public spending and potential tax rises, signalling more austerity ahead.

The new Prime Minister’s biggest challenge is fixing the economy and dealing with the effects that the cost of living crisis is having on the country. He hasn’t outlined his plans specifically, but he’s said before that fighting inflation is a priority – which could mean that interest rates will stay high in the short term.

Another important issue is how the government will help people with the rising cost of energy. With the energy price guarantee now due to end in April 2023, many people will want to know if Sunak intends to replace it with another scheme, or find some other way of providing support.

When it comes to housing and mortgages, Sunak’s previous record includes the extension of the Stamp Duty holiday in 2021 and the launch of the 95% LTV mortgage guarantee scheme. Liz Truss had planned to overhaul planning law and let local authorities approve new developments more easily and it’s not known if Sunak will continue with those plans.

Whatever Sunak’s specific plans may be, the financial markets have responded well to his appointment as Prime Minister, and things appear to have settled. His financial experience seems to have brought some stability, and it’s thought that this might eventually lead to mortgage rates falling in the future.

That’s brought you up to date (as of 25 October, anyway!) We’ll be watching to see what the new Prime Minister does next so we can keep you informed, but in the meantime, expect more changes.

5. Speak to Dragon Finance.

If you’re looking for a re-mortgage and another fixed rate deal, want to reduce your outgoings by consolidating some debt, or just worried about rising rates and need some advice on what to do next, contact us to speak to one of our whole of market mortgage advisers. They’ll go through your options and find you the best deal to give you a solution that works.

 

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