The Unintended Consequences of the Mini-Budget on Your Mortgage
The fallout from Kwasi Kwarteng’s mini-budget sent the money markets into panic, and the mainstream media drew full attention to rising mortgage interest rates. What is happening now, and what does the lasting consequence of Kwarteng’s plans mean for landlords?
The UK economy was sent into panic mode following the announcements made in Kwarteng’s mini-budget. Just one month later, we now have both a new Prime Minister and a new Chancellor of the Exchequer, but despite this, the mortgage market is still dealing with the lasting consequence of ‘Trussonomics’.
Confidence in the UK markets fell with the budget announcements, and, as such, SWAP rates rose substantially. SWAP rates are what lenders pay to other financial institutions to get fixed funding for a specific period of time. The length of time is typically two, three, five or ten years, and the cost of the SWAP rate is used to price relevant fixed rate mortgage products. Lenders price their products to ensure a profit margin against these SWAP rates.
As SWAP rates continue to rise, so do fixed rate mortgage products. Of course, rates had been steadily rising throughout the year, along with the Bank of England Base Rate (BBR) rises; however, the last few weeks have seen much more substantial jumps in pricing. Up until this point, RTI (rent to income) calculations for buy to let mortgages had been stable against the BBR increases, with affordability tighter against applications but still plausible. However, with such an increase in rates, these calculations have now had to change.
What the changes to RTI calculations mean for borrowers
The latest increase to RTI calculations has restricted not just how much applicants can receive per pound of borrowing, but it has also left many unable to get a new mortgage. While this may seem harsh in an already economically challenging time, lenders are doing their best to offer responsible finance in a changing political landscape. The increased cost to borrowers means that lenders want to ensure applicants have a greater financial buffer against unforeseen circumstances, maintenance costs, etc. This does, unfortunately, mean that if an applicant’s rental income is not high enough to cover both the mortgage and the allocated buffer lenders are looking for, they won’t be eligible for a new rate.
When a borrower can no longer afford a new mortgage product, they are known as a ‘Mortgage Prisoner’. In this instance, the applicant is effectively ‘stuck’ with their current provider as they cannot afford a new rate elsewhere. Unfortunately, with these new and tougher RTI calculations, we expect that more borrowers will find themselves in this situation.
What do we expect going forward?
Rishi Sunak’s appointment to Prime Minister and his plans for the economy has brought back some confidence in the UK market, which in turn has meant that the rise in SWAP rates we saw after the mini-budget has been largely reversed. This reversal means there is a chance we could see current fixed rate pricing lower slightly to align with SWAP rate levels, albeit not to the lows that we have seen in the past couple of years. As such, we can hope to see RTI calculations soften again with the settled fixed rates and mortgage market.
What’s clear is that landlords and property investors are enduring a volatile and shifting market against the ever-changing political backdrop. With the unforeseen challenges the money markets have faced, rates rose much quicker than initially expected, leaving many rightly concerned. With another Monetary Policy Committee meeting next week and industry experts predicting a further Base Rate rise, the challenge is certainly not over yet. What’s important to note, however, is that you have plenty of options available to you. You can use our free online buy to let mortgage calculator to see what rates you could access, and one of our expert mortgage brokers will be in touch to see how we can help you. Alternatively, you can call us on 0345 345 6788 to discuss any property finance concerns you may have.
26th October 2022
