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Mini-budget pushes mortgage market to the edge

Mini-budget pushes mortgage market to the edge
The prime minister and chancellor are under fire following the markets' reaction to their mini-budget. (Reuters/Dylan Martinez)

The country has barely got its breath back following the death of Queen Elizabeth II, the proclamation of Charles as King and the unveiling of government plans in response to the cost of living crisis.

Now, the mini-budget published just last Friday – announcing a £45bn tax-cutting plan – has sent the pound crashing, pensions funds and insurance giants rushing to sell bonds and mortgage lenders to pull deal after deal in efforts to stay solvent.

And as a result, the Bank of England has stepped in to launch a temporary bond-buying programme; in other words, it is trying to bail out a government plan five days after it was introduced, to shore up the health of the UK economy.

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One of the clearest identifiers of that health is the housing market, so a key question is how damaging the government plans will be to the mortgage market, and is it a case of getting worse before it gets better?

'Utter carnage'

It is fair to say there is panic in the air. And that fear is filling the vacuum between now and November 23 – the date earmarked for when chancellor Kwasi Kwarteng will set out further details to the government’s fiscal rules.

The BoE has also said it will “not hesitate to change interest rates”, while lenders have warned of rates increasing to almost 6 per cent.

Paul Neal, equity release and mortgage adviser at Missing Element Mortgage Services, describes the situation as “utter carnage”.

Neal says: “The wheels are coming off the mortgage market. Lenders are still withdrawing products, leaving brokers unsure when they will actually open again. We currently have 22 lenders who have stopped lending completely, and this list is only getting longer. Without mortgages, the property market could go pop. 

“Many of our clients are in a Mexican stand-off between pulling the trigger on a property transaction and fleeing the market altogether. So many are unsure about whether to proceed. We have a mixture of clients who are rushing to get their applications in, and others standing off and waiting to see what the future holds.”

Prices to fall?

Graham Cox, director of Self Employed Mortgage Hub, is concerned house prices could fall by 20 per cent or more over the next three years.

"I'll be accused of being a doom-monger, but if you use simple maths and common sense, how can house prices not fall?" Cox says.

"A lack of housing supply won't help one iota when mortgage rates are somewhere between 5 per cent and 7 per cent, as is likely over the coming months.

"Housing is vastly overpriced and decoupled from average wages thanks to extended terms, higher income multiples and, above all, dirt cheap rates. With rates on the rise, the decade-long property bubble is about to burst. The worm has turned. It's a buyer's market now."