Rishi Sunak: Tax cuts promised but inflation remains high, and the cost of borrowing will continue to rise says the Chancellor
Date: March 2022
Following the Chancellors Spring statement, we discuss the likely implications for UK mortgage holders and whether there is a legitimate cause for concern.
Following on from a particularly heated PMQ (Prime Ministers Questions) today, The Chancellor of the Exchequer, Rishi Sunak took centre stage to address the house and unveil his spring statement where he outlined the Governments plans to address the cost-of-living crisis.
The ONS (Office of National Statistics) figures show that the UKs rate of inflation currently sits at 6.2%, the highest it has been since March 1992.
With UK households already feeling the pinch of the cost-of-living crisis, many tuned in to hear what the chancellor had to say, but if you missed it, then here are the highlights.
War in Ukraine
Rishi opened by discussing the conflict in Ukraine and the tough sanctions which have been placed on over a thousand Russian individuals and organisations. He commented that whilst he stands addressing the house, there are Ukrainians hiding underground for their safety and that their turmoil makes us grateful for our own security, security backed up by the strength of our economy he continued.
He stated that his aims were for a “Stronger, more secure economy for the United Kingdom”.
Whilst he agreed that the tough sanctions on Russia were necessary, he commented that “the actions we’ve take are not cost free for the UK”.
The OBR (Office for Budget Responsibility) has said that there are unusually high levels of uncertainty surrounding the impact of the war, warning that they expect the rate of inflation to hit 7.4% this year.
The three-step plan
To tackle the current cost-of-living crisis, the chancellor revealed the governments three measures which they were going to take to ease the pressure.
1. Fuel Duty Cuts
For only the second time in 20 years, fuel duty is being cut by 5p per litre. The biggest ever cut to Fuel duty said Rishi.
The cut will come in to place at 6pm today (23rd March 2022) and will stay in place for 12 months.
2. Energy Efficiency
Sunak explained that under European law, it has been difficult to receive the 5% VAT relief on items and materials which will make homes more energy efficient. Since Brexit, we are no longer controlled by European law and Rishi unveiled plans for 0% duty to be applied to such items and materials.
These cuts will remain in place for the next 5 years and will remove the red tape, along with the duty which has acted as a barrier for people to receive the benefits. He cited that tackling the energy crisis will be greatly helped by making UK homes more energy efficient and less susceptible to the rising costs of energy.
You can find out more about making energy efficient improvements to your home from our partner Ecologi in their blog: Three steps to creating an energy efficient home.
3. Doubling the household support fund
This is the fund which is designed to ease financial pressures on residents by providing short-term help with food, fuel bills and other essentials to those who need it. This Funding is to be received from April 2022.
National Insurance will increase, but so will the threshold
The shadow chancellor commented that the government had a great opportunity to cut the planned rise to National Insurance. However, this is not what has been put into place. The National Insurance will go up next month as expected, but the threshold has been increased by £3,000. Rishi commented that 70% of workers will have their taxes cut by more than the new levee will see it increased by. So, for the most of us, this is good news.
Key take-aways
The chancellor estimates that the amount of interest paid on debt this year will be 4X what was paid previously in 2021. This will likely add to the worries of UK mortgage holders who are concerned whether they will be able to afford their mortgage repayments when their renewal arrives.
The cost of borrowing is going to continue to rise
Rishi Sunak – Chancellor of the Exchequer
With the cost of living increasing so much, it is increasingly likely that mortgage affordability will also feel the pinch.
Mortgage lenders calculate costs of living into their sums when they are considering how much they can lend an individual on a mortgage. With costs increasing across the board, it is likely that we will soon see lenders increase these amounts. This ultimately means that we would see a reduction to the total mortgage loan amounts offered. Put simply, you will be able to borrow less.
Mortgage rates are likely to keep rising
If inflation continues to rise as it is, it is likely that the Bank of England will make further increases to the bank rate. This will have a knock-on effect and will likely see lenders increasing their interest rates as money becomes more expensive for them to borrow.
Inflation is now higher than it has been for 30 years and as a comparison to today, 30 years ago mortgage interest rates were averaging 8.39%.
We doubt that interest rates will reach these hights anytime soon, but if they did, it would be a serious cause for concern.
A mortgage of £100,000 on an interest rate of 2% over 30 years would equate to monthly repayments of £370. Whereas the same mortgage with the 1992 interest rates of 8.39% would mean monthly repayments of £761 per month.
Are you concerned about your mortgage? Contact one of our mortgage experts today for a free conversation about your best options.
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