Written By Em

The Chancellor, Philip Hammond, has been urged to scrap Stamp Duty in this month’s Autumn Budget on Wednesday 22^nd November 2017.

The Adam Smith Institute says that axing Stamp Duty would help to solve the housing crisis and deliver a £10 billion boost to the economy.

The think tank believes that the tax is putting people off moving to new jobs and keeping households living in homes that are too large for their needs.

It says that Stamp Duty does so much damage that it is “almost as bad as setting fire to the money instead of raising it in tax”. Instead, the institute suggests raising Council Tax on the most expensive properties.

The institute’s Sam Bowman says: “Stamp Duty is the worst tax we’ve got. It is gumming up the housing market and keeping people trapped in the jobs that aren’t best for them.

“Scrapping it should be a no-brainer.”

Last year, Stamp Duty raised a record £11.7 billion for the Treasury – up from £10.7 billion in the previous year.

Steven Cameron, the Pensions Director at Aegon, looks at the generational impact of the controversial tax: “Hailed as the country’s most damaging tax by the Adam Smith Institute and swelling the Government’s coffers by as much as £12 billion last year, the property tax, Stamp Duty, has been in the spotlight this week.

“Seen as the root cause of our clogged up housing market, controversy is raging with what to do to make the system fairer. We’re very familiar with the situation first time buyers find themselves in, struggling to get on the property ladder, but we also need to reflect on Stamp Duty costs as a deterrent to downsizing. At the heart of the issue is older people in family homes, too large for their needs, discouraged from downsizing because of Stamp Duty, which is, in turn, preventing growing families from moving up the ladder.”

He continues: “But the impact goes beyond just the housing market, affecting those approaching and in retirement as well. It’s also a matter of fairness across the generations – a consideration that the Government has stated will shape future policies – and an issue that receives endorsement from the financial adviser community.

“The removal of Stamp Duty would help to encourage pensioners to downsize, freeing up family homes. For those pensioners who are property rich but cash poor, this would also offer a new means of funding their retirement. This could become increasingly important, as future generations of retirees will no longer benefit from the generous defined benefit pensions of today’s retirees.”

Cameron concludes: “For most people, whether in the younger or older generations, their two greatest financial commitments are their house and their pension. The Government needs to make sure its policies in these areas complement one another.”

Separately, an accountancy firm is calling for the Chancellor to make it more attractive for landlords to sell up if they want to.

Bishop Fleming’s Head of Tax, Andrew Browne, says that the Government is taxing landlords out of the rental market, through a reduction in mortgage interest tax relief, the 3% Stamp Duty surcharge and the withdrawal of the Wear and Tear Allowance. Landlords have also recently been subject to more stringent mortgage lending criteria.

Browne explains his concerns: “These recent changes are designed to hit private landlords, but what the Government has not done is to make it easier for those landlords to downsize their portfolios, or leave the sector completely, without incurring massive tax penalties. It has been all stick and no carrot from the Chancellor.

“Landlords face a Capital Gains Tax bill of up to 28% on any gains they make on the selling of properties, without any relief for the time a property has been held, or for inflation.”

He continues: “In the past, any gains would have been tapered depending on the length of ownership, and any increase in value purely through inflation would have been removed with an indexation allowance. Both these reliefs have been removed by successive governments, though indexation relief continues to be available to companies.

“The removal of taper and indexation reliefs has created a punitive retrospective tax on private landlords, who may have bought their properties many decades ago. Inflationary pressures are outside the control of landlords, so it is unfair that they should not get some measure of relief from gains that have arisen simply through inflation.”

What are you hoping to hear from the Chancellor in the Autumn Budget statement?

The property industry has been quick to react to yesterday’s interest rate rise from the Bank of England (BoE).

The official base rate has been lifted from 0.25% to 0.5%, marking the first increase in over ten years – since July 2007.

The move reverses the cut in August last year following the vote to leave the European Union.

Almost four million households face higher mortgage interest payments following the rise, but it should give savers a modest lift in their returns.

As well as many of the country’s 45m savers, anyone considering buying an annuity for their pension will also see better deals. The main losers will be households on variable rate mortgages.

Of the 8.1m households with a mortgage, 3.7m (46%) are on either a Standard Variable Rate (SVR) or tracker rate.

According to UK Finance, the average outstanding balance is £89,000, which would see payments increase by between £11-£12 per month following this change.

The BoE estimates that almost two million mortgage holders have not experienced an interest rate rise since taking out a mortgage.

The nine-strong Monetary Policy Committee (MPC), which sets the base rate, justified the increase by saying that falling unemployment means that there is “limited” slack in the economy. Seven out of the nine members voted in favour of higher rates.

They believe that growth cannot accelerate much more without causing prices to rise more quickly.

However, the MPC repeated previous guidance that future rate rises would be at a “gradual pace and to a limited extent”.

The financial markets are indicating two more interest rate increases over the next three years, taking the base rate to 1%.

The MPC also reported that the decision to leave the EU is having a “noticeable impact” on the economic outlook. It said that there were “Brexit-related constraints” on investment and labour supply, which were holding back the potential growth rate of the UK economy.

The property industry has responded to the interest rate rise:

Comments 

Russell Quirk, the Founder and CEO of online estate agent eMoov.co.uk, says: “A fair adjustment to interest rates and one that takes us back to the pre-referendum norm of 0.5%. This should do little to faze homeowners and buyers on variable rates, with the average homeowner out of pocket an extra £16 or so a month, and water off a duck’s back for those with a fixed rate security blanket.

“While the wider economy to some extent has been comatose since the Brexit vote, it has started to show signs of life in terms of manufacturing and employment, which should continue to build.

“Where the UK property market is concerned, there is certainly no cause for panic, as we are unlikely to see any further adjustments too soon down the line, and it is very unlikely that we will return to the extraordinary highs of the late 80s, when many fell into a financial black hole.”

Angus Stewart, the Chief Executive of Property Master, which connects landlords with mortgages, continues: “For many buy-to-let landlords, this will be the first rate rise they have seen. If they are on a fixed rate now, they will have some protection, but they need to think of the higher costs they are likely to face once that deal comes to an end.  Today’s rise is unlikely to be the last, as the Bank seeks to normalise rates following the market crash and then last year’s Brexit vote.

“This creates a whole new environment for buy-to-let landlords and comes swiftly on the back of tightening lending criteria and the tapering of mortgage tax relief.

“We expect that the buy-to-let market will become increasingly professionalised, as smaller players facing increased cost and regulation will seek to exit the sector.  For those that remain, we can expect many to begin remortgaging before rates move any higher, and it is interesting to see that there has been a mixed response from lenders, certainly in the run-up to today’s decision, with a number continuing to offer low fixed rate deals.”

Lea Karasavvas, the Managing Director of Prolific Mortgage Finance, also reacts: “Mark Carney has handed a generation of borrowers, who have never experienced a rate rise, the fright of their life. But if he hadn’t, Halloween would have been only the second scariest event of the week.

“The Bank faced a terrifying loss of confidence if it balked again, after one of the most hyped run-ups to a rates decision in history.

“The market, convinced it was coming, had already voted with its feet. The pound had climbed, swap rates had risen, and every lender bar Nationwide had increased interest rates in anticipation.

“Historically, inflation of 3% has been the magic number to trigger rises and this has been borne out again.

“Homeowners knew the writing was on the wall. We normally expect fairly equal numbers of remortgages compared with new purchases, but we saw remortgaging running at 90% of all mortgage activity in October.

“That represents a massive flight to safety for those already on the housing ladder, and not a hugely encouraging vote of confidence on the demand side.

“Consumer confidence fell last month, so I expect we’re going to see this kind of sentiment continue to filter through the broader economy.”

The Founder Director of estate agent James Pendleton, Lucy Pendleton looks from a London point of view: “Londoners who have clambered onto the housing ladder in the last ten years are entering a brave new world.

“Anyone not on a fixed rate deal will likely be witnessing something they’ve never seen before – the rising cost of monthly repayments.

“But that’s not going to come as a surprise to anyone. Buyers are savvy and won’t be thrown by this. Most have been telling us they have already factored in an entire percentage point rise over the course of the next year.

“That’s a direct result of the will-they-won’t-they uncertainty that has been created by the Bank repeatedly kicking the can down the road. This small increase won’t move the market and will actually give buyers more certainty about the direction of travel.”

The CEO and Co-Founder of buy-to-let specialist Landbay, John Goodall, explains his thoughts: “The first rate rise in a decade could fire the starting gun for an increase in residential rents. Landlords have had to face a catalogue of challenges over the past couple of years, from stricter regulation, reductions to tax relief, and a significant Stamp Duty tax hike when buying a buy-to-let property. Many expected these would be passed onto tenants, but low mortgage rates have enabled landlords to absorb much of these costs, especially those that are wary of tenants facing negative net wage growth, so a base rate rise could make all the difference.

“Whether tenants are renting as a stepping stone on the way to homeownership, or in some cases choosing to rent for life, this generation is relying on a well-served buy-to-let market to ensure rental growth doesn’t become unbearable. What is now needed is some firm Government commitment to improving standards, affordability and supply of rental properties. Fast approaching, this month’s Autumn Budget will be a chance for the Chancellor to reassure the industry on its plan for tackling this growing demand for housing.”

Charlotte Nelson, the Finance Expert at Moneyfacts.co.uk, looks at how the change will affect the mortgage market: “Competition in the mortgage market has remained high and borrowers have experienced some of the lowest rates on record. However, the speculation prior to today’s base rate rise has been causing rates to slowly creep up since September, and so today’s announcement may see an end to the lowest of deals.

“Lenders have been keen to attract the attention of borrowers to protect their mortgage book in case of a rate rise, which is one of the main reasons both the cost and availability of deals has improved. Indeed, the number of mortgage deals has now increased to 4,748 from 4,151 in just one year.

“The last time the markets saw a base rate rise, in July 2007, the average two-year fixed rate stood at 6.24%, whereas today the rate is significantly lower, sitting at 2.33%. Over the same period, the SVR has fallen from 7.41% to 4.60% today.

“This rate increase will have a significant impact on those currently on their SVR. Based on the average SVR of 4.60%, today’s rate rise represents an increase of £28.72 to monthly repayments. However, with fixed rate mortgages still low, borrowers will be significantly better off switching deals now before it may be too late.”

The Editor in Chief of money.co.uk, Hannah Maundrell, continues: “This base rate rise doesn’t come as a great surprise, but it should be a wake up call for borrowers and savers alike.

“While the rate rise does mean some people will pay more on their mortgage, it’s not as devastating as it first sounds. The many homeowners on variable rate deals should check whether they could save money by switching to a fixed rate or, if you have significant savings, offset mortgage; this would have the added benefit of giving you some protection against subsequent rate hikes too. The difference could be thousands, so it’s worth exploring.

“I don’t expect to see the cost of other types of borrowing shoot up dramatically, although we may do in the future. The key thing is to always shop around for the cheapest option and borrow the smallest amount for the shortest period you can.

“I’m not expecting savers to start rejoicing; even if this small increase is passed on by the banks, average savings rates will still fall far short of inflation. If you have savings, it’s worth checking if you can make your money work harder for you while it’s in the bank – this may well mean paying down debts instead.”

David Whittaker, the CEO of Mortgages for Business, gives his comments: “While the move to 0.5% only takes us back to where we were in July last year, the change does mean that homeowners and landlords on variable rates will see their monthly mortgage payments rise. Mortgage lenders have been preparing for this day for a while. In fact, it only compounds rises already made due to recent movements in swaps and LIBOR – other factors which affect mortgage pricing. The most aggressively priced fixed rate products available to homebuyers and landlords are already disappearing, so borrowers will have to act quickly if they want to protect themselves against further rises by locking into a good five-year fixed rate now.”

The CEO and Founder of online mortgage broker Trussle, Ishaan Malhi, agrees: “The age of record low interest rates appears to be coming to an end. While we’re only seeing a fractional increase, homeowners who aren’t on a fixed rate mortgage should still be considering how this will affect their monthly payments. The average variable rate borrower will be paying an extra £17 this December, and, although this doesn’t seem like a lot, it adds up over the course of a year. Those with high mortgage debt will be paying a lot more.

“Depending on how inflation responds to today’s increase, there’s also every chance we’ll see another base rate rise in the next six months or so. With this in mind, now is the right time for borrowers to lock in a low fixed rate mortgage, and there are still plenty of good deals on the market.”

Shaun Church, the director of mortgage broker Private Finance, insists that borrowers shouldn’t be panicked: “Mortgage holders shouldn’t be panicked by the hike in interest rates. Mortgage rates appear to be bottoming out and have been inching up among some lenders in recent months. The change in the base rate makes further rises more likely, although these would only be very gradual. Those on a fixed rate term will be sheltered from any changes until their fixed period ends, and even borrowers with a variable rate may not see any changes immediately.

“Rising rates are a key consideration for mortgage affordability. However, lenders’ stress tests are purposefully designed to ensure borrowers can cope with this. It’s also important to remember mortgage rates are still at a very low base and there would need to be a significant amount of movement before the cost of borrowing is no longer considered low.

“Those coming to the end of their mortgage deal may wish to consider a longer-term fix to lock into current rates. However, there are other factors aside from the headline rate, such as product flexibility, that need to be weighed up when choosing a product. A mortgage broker can help borrowers choose the best deal for their individual circumstances.”

A partner at accounting, tax and advisory firm Blick Rothenberg, Nimesh Shah, gives his point of view: “The largest affected group will be homeowners with standard variable rate or tracker mortgages, who will see their monthly mortgage payments increase.

“The rate rise is bad news for first time buyers and people moving home, as they will see the cost of borrowing increase. There is more pressure now on the Government to reform Stamp Duty Land Tax (SDLT) at the Budget on 22^nd November to help first time buyers, and there could be a form of SDLT holiday announced.

“Landlords are not going to be pleased by the rate rise and they have been particularly squeezed in recent times, with the increase in SDLT and the mortgage interest relief restriction now taking effect. It is a double blow for landlords, who will see an increase in mortgage costs without being able to achieve tax relief on the increased cost.

“Landlords may look to pass on the increased cost through higher rents, which is again concerning for those looking to save to buy a home. Alternatively, landlords facing higher costs may look to sell all or part of their property portfolios.

“The interest rate rise is good news for savers, but it is important to remember that rates have been painfully low for a long period of time and some banks had reduced savings rates irrespective of the base rate. It remains to be seen whether the banks will pass on the interest rate rise to savers.

“The rise has effectively halved the amount a basic rate or higher rate taxpayer would need to use their personal savings allowance (PSA), but a basic rate taxpayer would still need cash savings of £200,000 to generate £1,000 of interest in order to fully use their PSA.”