So much for the property-owning democracy: buyers face problems wherever they look

The mortgage market is starting to come back to life. More or less. Kwasi Kwarteng’s disastrous mini-Budget resulted in a mass exodus of home loan products.

Moneyfacts, perhaps the best source of market information, recorded 3,961 mortgage products on the day of the mini-Budget, a Friday. Between the following Tuesday and Wednesday, a record 935 were withdrawn overnight. More followed over subsequent days. The market hit a nadir of 2,258 at the end of last week.

The number had recovered to 2,358 at the time of writing, which might be seen as a good sign until one considers the way in which prices have developed. Those mortgages are now much more expensive.

Buyers were already faced with a fairly grim situation. In the aftermath of the pandemic, house prices exploded. In some places – parts of Wales, for example – they recorded 10 years’ growth in just two.

The impact of the Budget on expectations for UK interest rates has made their situation much, much worse. Concern about a sharp rise in rates over the coming months, to counter the inflationary impact of Kwarteng’s giveaway, is what prompted banks and building socieites to pull so many of their offerings.

Fixed-rate deals are priced based on what’s known as the interest rate “swaps” market. These are derivatives and their price is based on market expectations for rates over time. The swaps market was buffetted by the turmoil the chancellor created. The banks saw what was happening, took fright, headed for the exit and reset their prices.

The average rate on a two-year fix was 4.74 per cent on Budget day. Five-year deals tend to be pricier – borrowers typically pay a premium if they want to lock in for longer – but the Moneyfacts average was scarcely any different at 4.75 per cent. This reflects the markets’ expectation that Bank of England base rates will rise sharply over the short term but fall back over a longer period.

Now? It’s 5.97 per cent for the two-year and 5.75 per cent for the five.

The chancellor saved borrowers some money by raising stamp duty thresholds, with none to be paid for properties worth up to £250,000. The buyer of an average-priced UK home, at £312,000, would save £2,500 as a result.

Here’s the problem. Let’s assume you wanted to buy this property with a 90 per cent mortgage over a two-year term. Had you taken out a two-year fix at the Budget-day average, your monthly repayments would have been £1,600. Today the figure is £1,804. So the stamp duty saving would be obliterated at the beginning of the second year of your fix.

Pre-Budget, the level at which first-time buyers had to pay stamp duty was £300,000. So on an average priced home, a first-time buyer’s savings would be negligible. They would still get clobbered by the new mortgage rates, however.

The new stamp duty calculations really work only for wealthier buyers of higher-value properties in the capital. Bankers and the children of the people Kwarteng joined for a glass or two of fizz afterwards, for example.

Elsewhere, the result of Mr Kwarteng’s financial irresponsibility, and the panicked reaction of the markets to it, is that homes have never been less affordable.

Buyers are usually best advised not to pay too much attention to the market. Purchasing a home is an investment for the long term. If you find somewhere you like, and can afford, you’re best to go for it because the market can easily move against you even if it looks toppish.

Now? It’s possible that equation has shifted. Banks are very much taking a wait-and-see approach with the market. Some might be prepared to offer better deals over the coming days, particularly those keen to grab some extra market share. It is also likely that some of the froth will come off the top of what has been an over-excited market.

But that creates problems of its own: people tend to be understandably wary of buying into falling markets. Why pay X when you might save 10 grand this time next week?

So much for encouraging people onto the housing ladder and the “British dream” of a property-owning democracy.