The ill-fated Mini-Budget was delivered on 23 September 2022, sending mortgage rates skyward and Liz Truss packing. Where are we three years on?
Cast your mind back to 23 September 2022. Charles III had just become King, football fans were gearing up for the first-ever winter world cup, and Liz Truss was the prime minister.
That same day, Truss’s government announced a string of unfunded tax cuts that would send gilt yields soaring, cause the pound to plummet, and require the Bank of England to step in to maintain financial stability after pension funds were impacted.
Mortgage rates had already been rising in response to base rate hikes that began in late 2021, but the Mini-Budget caused them to jump further, with the average five-year fixed-rate deal peaking at 6.51% on 20 October 2022, according to financial information service Moneyfacts.
Today, mortgage rates have eased significantly and are only slightly higher than they were before the Mini-Budget, but government bond yields have been rising again in response to new fiscal challenges. Long-term gilt yields are now above the levels seen in the aftermath of Truss’s fiscal event, with 30-year borrowing costs hitting their highest level since 1998 earlier this month.
“November’s Autumn Budget has taken on a new importance as chancellor Rachel Reeves will seek to reassure financial markets that her borrowing and spending plans are sustainable,” said Richard Carter, head of fixed interest research at Quilter Cheviot, the wealth management firm.
“While the UK is not alone in its fiscal challenges, rising bond yields represent something of a vicious cycle for the government as they increase the cost of servicing existing debt, and for this government it is an issue it needs to get a hold of before market sentiment sours further,” he added.
Where are we with mortgage rates?
After jumping in the aftermath of the Mini-Budget, mortgage rates remained elevated thanks to a combination of high interest rates, inflation and swap rates. They rose again in the summer of 2023, with the average two-year rate surpassing its Mini-Budget peak to reach a new high of 6.86% on 26 July 2023.
Mortgage rates have eased significantly over the past two years but are still slightly above pre-Mini-Budget levels, with both the average two and five-year rates hovering around 5% today. Recent drops won’t offer much comfort to those coming to the end of a relatively cheap five-year deal agreed back in 2020.
In September that year, the average five-year rate was 2.49%, compared to 5.02% today. This rise in rates equates to a £551 increase in monthly repayments for someone with £400,000 of borrowing, equivalent to £6,612 more per year. These calculations assume a total mortgage term of 25 years, and are based on figures we plugged into MoneyHelper’s mortgage calculator.
Around 1.6 million fixed-rate deals are due to come to an end in 2025, according to trade association UK Finance.
Will mortgage rates fall further?
Most economists expect between one and three more interest rate cuts before the base rate settles, however the pace of cuts has become more uncertain in recent weeks. Inflation is expected to hit 4% when September’s figure is published next month, which is keeping the Bank of England cautious. Mortgage rates have been fluctuating as a result.
Other factors also influence mortgage rates, including inflation, swap rates, and competition between lenders. This means mortgage rates can sometimes tick upwards slightly, even when the base rate falls.
“The Bank of England’s Monetary Policy Committee meets eight times a year to set the base rate, however, an estimated half a million changes to the swap rate take place over the same period,” said Adam French, head of news at Moneyfacts. “This market is valued at £350 trillion, and rates can change every second – sometimes multiple times per second.”
“Looking to the end of the year borrowers can still expect mortgage costs to continue slowly sliding, but there may be occasional blips as wider economic data has an ever-greater effect on the rates lenders set,” he added.
Alice Haine, personal finance analyst at investment platform Bestinvest, suggests acting quickly if you are looking to refinance. “Anyone coming off an old deal would be wise to lock in a new product rapidly rather than waiting for borrowing conditions to ease further,” she said.
Haine points out that recent volatility could continue, “particularly in the run-up to the Budget, as policymakers will be keen to assess the impact of any new tax measures the chancellor will roll out.”
If you are weighing up whether to fix your mortgage or opt for a variable rate, we share further details in our guide.
Should markets be concerned about higher gilt yields?
During the Mini-Budget crisis, 30-year government bond yields peaked at 5%, according to investment platform AJ Bell. Given yields on the same instruments are now higher than this (5.5% at the time of writing), should markets be concerned?
“There are a number of reasons why the level of concern about UK gilt yields isn’t the same as September 2022,” said Laith Khalaf, AJ Bell’s head of investment analysis. “Probably the biggest component in the Mini-Budget gilt crisis compared to the situation today is the speed with which yields rose.”
Yields rose by 1.2 percentage points in three trading days back in 2022, according to AJ Bell. The platform says the same jump has taken around a year more recently.
It is not a UK-specific problem this time either. Bond yields have also been rising in the US and Europe. Although the same was true in 2022, “the days immediately following the Mini-Budget marked a temporary UK decoupling from the global bond market, suggesting more local factors were at play,” Khalaf said.
This doesn’t mean higher yields aren’t creating a headache for the chancellor. They make it more expensive for the government to borrow money, thereby eroding its fiscal headroom. High borrowing costs are part of the reason the Treasury is expected to raise taxes at the Autumn Budget on 26 November.
Reeves has been clear that she won’t budge when it comes to her fiscal rules. These state that the government cannot borrow to fund day-to-day spending – it has to be paid for through tax revenues. This is a marked difference in policy compared to Truss’s unfunded tax cuts. In other words, things look quite different today.
https://moneyweek.com/economy/uk-economy/three-years-after-the-mini-budget-where-are-we-now
