Home Truths: Could the Budget Push Mortgage Rates Higher?

There is a slightly unusual feeling in the mortgage market this week because, although the Bank of England does not meet until 5 November, I suspect Wednesday’s Budget could have just as much influence on mortgage pricing in the short term as the next interest-rate decision.

That might sound a bit odd at first because, of course, the Chancellor does not set mortgage rates and certainly does not decide what Halifax, Santander, Nationwide or anyone else charges for a two- or five-year fix. What he can do, though, is change the mood of the financial markets, and that matters because when markets get nervous about inflation, government borrowing or the wider economic outlook, the cost of money tends to move pretty quickly.

That is where the mortgage market comes in.

Why this Budget matters more than usual

The Chancellor delivers his Budget on Wednesday against a fairly uncomfortable backdrop. Inflation has moved back up to 3.5%, government borrowing has been running above forecast and the cost of servicing the country’s debt is becoming increasingly painful. At the same time, gilt yields remain elevated, which effectively means investors are demanding a higher return to lend money to the Government.

Now, gilt yields are not mortgage rates and they are not the same thing as Swap rates either, but they are all part of the same financial conversation. If investors become worried that the Government is going to borrow too much, spend too freely or do something that adds to inflation, markets can react very quickly. That can feed through into wholesale funding costs and eventually into the price lenders charge borrowers.

It is why I think Wednesday matters so much. The Budget does not need to be spectacular. In fact, spectacular is probably the last thing the mortgage market needs. What it really needs is something credible, fairly boring and reassuring, which I appreciate is not normally the sort of thing politicians dream of being remembered for.

Mortgage rates have steadied, but nobody should get carried away

There has been a little bit of welcome relief in mortgage pricing recently, with some lenders trimming rates and competing a little harder for business. That is encouraging because it shows lenders still want to lend and, where their funding costs allow, they are prepared to sharpen their pencils.

But I would be cautious about reading too much into a handful of reductions. Mortgage rates are still much more expensive than borrowers became used to during the ultra-low-rate years, and the underlying cost of funding remains relatively high.

The important thing to remember is that lender competition and market conditions can move in different directions at the same time. A lender may reduce a fixed rate because it wants to hit a lending target, even if the wider economic backdrop remains uncertain. Equally, another lender may pull a product or increase rates if its own funding position changes.

That is why I keep saying that there is no such thing as one mortgage market or one mortgage rate. There are lots of lenders, lots of funding positions and lots of different appetites for business, all moving at slightly different speeds.

Bank Rate is only one piece of the puzzle

This is probably the bit I repeat most often at the moment, but it is worth repeating because the relationship between Bank Rate and fixed mortgage pricing is still widely misunderstood.

If the Bank of England increases Bank Rate next month, that does not automatically mean fixed mortgage rates jump the next morning. If financial markets were already expecting that move, much of it may already be reflected in swap rates and therefore in mortgage pricing.

The same is true in reverse. We can sometimes see lenders cutting fixed rates even while Bank Rate stays put or goes up, particularly if wholesale funding costs ease or competition increases.

So when people ask me, “Will mortgage rates go up after the Budget?” the truthful answer is that the Budget could move the markets, but the direction and scale of that move will depend on how investors interpret the whole package rather than one individual announcement.

If the Chancellor reassures markets that borrowing is under control and that the Government has a credible plan for growth, inflation and spending, that could help create a more stable backdrop. If the opposite happens and markets become nervous, funding costs could rise again.

I am not suggesting we are heading towards another mini-Budget moment. That comparison gets thrown around far too easily now. But it does mean the Chancellor has less room than usual for a dramatic surprise.

So what should borrowers actually do?

This is where we need to separate sensible planning from trying to become an amateur economist (the irony of me saying that is not lost on me!).

If your mortgage deal ends in the next few months, I would not be sitting around waiting for Wednesday in the hope that one announcement suddenly knocks half a percentage point off your mortgage rate. It makes far more sense to understand what options are available now, secure something sensible where appropriate, and then keep reviewing the market.

Depending on the lender, your application stage and the product, there may be scope to switch to a better rate later if one becomes available. The exact rules vary, which is why a proper conversation with an adviser is far more useful than staring at a comparison table and trying to second-guess the markets yourself.

The same applies to buyers. There is more stock around, sellers are generally having to be more realistic and that creates some genuine negotiating opportunities. In a market where borrowing remains expensive, negotiating £10,000 or £20,000 off the purchase price can be just as valuable as obsessing over a tiny movement in the mortgage rate.

Sometimes the biggest mortgage saving starts before the mortgage even exists.

And then there is the housing angle

We are also expecting the Budget to contain more detail around housing policy and support for first-time buyers, and I am very much in favour of sensible measures that help people onto the ladder, particularly those without access to the Bank of Mum and Dad. The problem is that we keep coming back to the same issue: supply.

New home registrations are down year-on-year and the Government is still talking about delivering 1.5 million homes over the course of this Parliament. Those two things are not exactly travelling in the same direction.

If we help more people compete for homes without making it easier and financially viable to build more of them, there is always a risk that some of that support simply pushes prices higher. We have been here before.

What I would like to see from the Budget is a more joined-up approach. Help buyers where it makes sense, absolutely, but also make development easier, improve planning, address the cost of building and give housebuilders enough confidence to actually get more projects moving. Housing policy has to work on both sides of the equation.

Monty’s Home Truth

Budget week always brings the usual combination of leaks, rumours and people confidently telling us exactly what the Chancellor is about to announce before he has even stood up at the dispatch box. For mortgage borrowers, I would try to tune most of that out.

What really matters is how the markets react to the overall package. If investors believe the Government has a credible plan, that can help create a more stable backdrop for lenders and borrowers. If they do not, funding costs can rise and mortgage pricing can become more uncomfortable again.

None of us can call that perfectly in advance, and that is why trying to time a mortgage decision around one Budget or one Bank of England meeting is rarely a great strategy. The better approach is to understand where you stand today, secure a sensible option if you need one, and keep reviewing things as the market moves.

The Home Truth this week is that the Chancellor may move markets on Wednesday, but borrowers do not need to gamble their mortgage on predicting which way they go. A good plan, a bit of flexibility and some decent advice will usually beat a heroic forecast.

Contact Us

If your mortgage deal is coming to an end, or you are buying and wondering whether to wait until after the Budget, speak to one of the team at Coreco. We can look at the options available now, explain what changing rates mean in real pounds and pence, and keep reviewing things as the market develops.