Mini Budget and UK economy

After Kwasi Kwarteng was announced as the new Chancellor, his emergency Budget speech called “mini budget” on Friday 23 September, suggested a change in tack for the Conservative Party. And after revealing his fiscal measures, that claim is hard to challenge and later it affected the UK economy.

As promised by new Prime Minister Liz Truss during her Tory leadership campaign, the new government views slashing taxes as the best way to tackle the UK’s growing economic problems. 

Shortly after Kwarteng unveiled his raft of new policies, Director of the Institute for Fiscal Studies, Paul Johnson, tweeted:

“£45 billion of tax cuts. This is the biggest tax-cutting event since 1972.”  

Kwarteng said the reason for such drastic measures is to stimulate the growth of the UK economy, tackle inflation, support businesses, and help households with the rising cost of living. 

And as other economic events, last week underlined, the government needs to act fast. 

On Thursday, the Bank of England announced another 0.50 percentage point rise in interest rates to address the UK’s worst bout of inflation in four decades. 

The base rate is now 2.25% - the seventh time it’s gone up since December 2021 and its highest point since 2008. The UK’s Central Bank also suggested the country may already be in recession. 

On the same day, the pound sunk to its lowest level against the dollar since 1985, with a one in four chance the currencies could reach parity; quite astonishing given that fifteen years ago a pound could be exchanged for two dollars. 

How this affected the mortgages and housing in the UK

UK house price growth flatlined in September with a stronger slowdown expected in the coming months as a combination of soaring inflation and mortgage rates makes moving unaffordable for many.

The latest snapshot from the building society Nationwide comes at the end of a torrid week for the housing industry as lenders pulled 40% of available mortgages from the market after Kwasi Kwarteng’s mini-budget speech.

Lenders began suspending products after the chancellor’s sweeping tax-cutting plans triggered a sell-off in financial markets and raised expectations for higher interest rates. The volatility made it increasingly difficult for lenders to price deals.

A typical UK home cost £272,259 in September, a zero increase on the previous month and the first-time house prices did not grow month on month since July last year, according to Nationwide.

Annual growth in prices dipped to 9.5% this month, the first-time house price growth has slowed to single digits since last October.

What to do if you are affected by this?

-Use savings to get a cheaper deal: if you have the money in your bank, you can pay off some of your mortgage which will reduce your monthly outgoings.

That only applies if you still owe more than 60% of your home's value on a mortgage though. The main bands where interest rates drop most are at 90%, 80%, 75% and 60%.

-Speak to a broker: worth using a mortgage broker to "navigate the maze" of the market. They'll have details of what lenders need for you to be accepted onto a mortgage deal. Plus, they might be able to help you find a deal that can only be accessed by them.

-Act now if your fixed rate mortgage is ending: If your fixed rate mortgage is coming to an end, some lenders let you lock in a new rate six months in advance. Many more let you fix three months before as well. So, if yours is coming to an end and you don't want to end up on a variable-rate mortgage, it's worth getting in touch with your lender now.

If your fixed deal isn't ending soon but you want to switch, you can do so, but you will have to pay early repayment fees which could cost you thousands.