The mini budget's impact on mortgages should not be underestimated
Conversations with Kate: From war in Ukraine to political upheaval, last year was one one of extraordinary events. In her latest letter, Kate Leppard, Head of Client Service, reflects on how this has impacted her clients.
Whether you loved or loathed any of the three Prime Ministers we had last year, or were simply indifferent, most would agree that three in four months is not conducive to stability. Add to that the cumulative impact of the “mini budget”, rising interest rates and inflation that the UK has seen in recent months and it is not surprising financial markets have been in turmoil. The impact of high inflation and rising interest rates on investment markets is discussed in depth by my colleagues, Caspar Rock and Chris Lewis. However, in my conversations with clients, I see that the implications extend well beyond portfolios. Many UK clients face higher taxes this year. For those who rely on investments for income, this is an unwelcome additional burden at a time when everything is costing more.
The effect of the “mini budget” on mortgages shouldn’t be underestimated either. In the UK, 715,000 households had tracker mortgages and 895,000 households were on variable mortgages in June last year, according to data from UK Finance, the UK financial services trade association. That means 1.6 million households would have seen an immediate rise in their mortgage payments last year. Not only did mortgage rates go up, but many mortgage products disappeared completely. This has caused many of our clients with loans or buy-to-let mortgages to re-evaluate their investments. Taking the latter, tax on income derived from those properties has risen and property sales are now subject to 28% capital gains tax. Equally, the cost of financing a buy-to-let property has gone up too. For example, one of my clients received a 5% rental income and the mortgage previously cost 3%, leaving a 2% profit. When their mortgage came up for renewal, they could only secure a 6% mortgage, meaning that they were left operating at a loss and they think the value of the property may also have fallen.
When it comes to investing, we haven’t been able to completely avoid the fallout in the government bond markets, but we have been underweight in bond markets. We have had a small exposure to bonds by historic standards in our clients’ portfolios and held short-dated bonds, which have less sensitivity to interest rate rises. We have also held alternative assets, such as infrastructure and renewable energy companies, which have proved relatively resilient. We typically invest across the globe on behalf of our clients. This has benefitted our client portfolios in a period of sterling weakness versus the US dollar. We are mindful that this has started to reverse as investors gain confidence in the fiscal policies of the current Prime Minister and Chancellor. For more on this, read Caspar Rock’s “Review and Outlook”.
Thankfully, some of the pinch points we saw over the summer have started to ease following recent government actions. Mortgage products have come back on the market and interest rates have come back down, quite meaningfully over the last few weeks. Meanwhile, as noted above, sterling has strengthened which should help to reduce food and energy import costs and the oil price has started to fall.
One positive of higher interest rates is that clients holding cash deposits with us can now earn a higher return than they have in many years. I generally advise clients to hold approximately two times their annual outgoings in a liquidity account, particularly where they rely solely on their investments to meet their living needs. I am working with many clients to make sure that their cash is benefiting from the higher rates now on offer. As we enter the New Year, I hope for a more positive year in 2023 and that inflation and interest rates pressures might start to ease, providing a more supportive backdrop to financial markets.