A low-key Budget means more breathing space for borrowers

The disastrous mini-budget of 2022 remains fresh in homeowners’ minds — particularly those who were on variable-rate mortgages at the time. The punishing rise in borrowing costs that followed sapped the property market of momentum and heaped pressure on household finances.

The relatively muted reaction to Chancellor Rachel Reeves's Budget on Wednesday is the key takeaway for mortgage borrowers. At £22 billion, the Chancellor still doesn't have much in the way of headroom, but it's better than the £9.9 billion she left herself in March. Yields on government bonds, which surged in the wake of the mini-budget, remained broadly steady following the Chancellor's speech as investors weighed news of the expanded headroom against the back-loaded nature of many of the tax increases.

It's unlikely that the new policies will meaningfully shift consensus views on the path of interest rates. Provided the data stays on track, the Bank of England is on course to cut the base rate in December, and perhaps once more in early 2026. That should give lenders enough confidence to keep trimming mortgage rates, as they have over the past fortnight. The best fixed rates now sit at 3.55% at 60% LTV, down from about 3.8% only three months ago.

While all this might sound benign, there remain considerable risks to the outlook. The Office for Budget Responsibility (OBR) warned that the £22 billion of headroom is still small relative to the uncertainties around its economic forecasts and the incoming "array of complex tax changes". While the immediate danger of resurgent inflation or a spike in borrowing costs linked to a bout of fiscal ill-discipline seems remote, it is not impossible. Our advice to borrowers is to secure a fixed mortgage rate as early as possible. Most deals can be renegotiated if better offers become available, and a fix protects you if borrowing costs move unexpectedly.

We're likely in for a solid if unspectacular year in the UK property market. Knight Frank's September forecasts suggested we'll see house price growth of 3% in the UK next year and 2% in London, which now looks a good bet. Higher-value markets are likely to under-perform while homeowners get to grips with the new mansion tax on homes worth £2 million or more. Even the government is uncertain as to how it will really play out: ministers acknowledged that “price bunching” is likely to occur below each band, which will reduce the projected yield. Fewer transactions will also raise less revenue from stamp duty land tax.

Nevertheless, a quiet budget is usually a good one for the mortgage market. Tax rises will likely dent sentiment and cool some movers’ appetite, but borrowing costs drive activity more than anything else, and on that front the Budget landed about as well as we could have hoped.

If you would like to discuss your mortgage options or speak to one of our advisors, please visit www.knightfrankfinance.co.uk.