The Chancellor has announced that stamp duty is to be abolished for all first time buyers on properties bought up to £300,000, effective from today. In addition, first time buyers purchasing properties up to £500,000 will pay no stamp duty on the first £300,000.
In his Budget, Philip Hammond announced that 80% of first time buyers would pay no stamp duty at all. With 358,000 first time buyers in the last year, this means that at least 24% of all sales in the UK’s housing market are set to be charged 0% tax. Once other exempt sales under £125,000 are taken into account, this figure will be even higher.
Two thirds of properties bought so far this year across the country have been under the new threshold but there are large regional variations. In Wales and the North East, over 90% of sales in the last year have been over £300,000 while just 17% of sales in London were for less than £300,000.
While good news for first-time buyers, this will further squeeze investors in the sub-£500,000 market who are already suffering from increased taxes. What's more, it does not, give any encouragement to owners higher up the chain to downsize.
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Fixed rate mortgages have been the most popular type of mortgage by far, which is not likely to come as a surprise given the ultra low rates on offer. With Bank of England Base Rate at rock bottom borrowers like the certainty that fixed rates offer, especially when interest rates look set to climb at some point.
The vast majority have therefore elected to lock their rate down with a fix, given the very competitive deals and the fact that there is little to no chance of Base Rate falling. Against that backdrop why might a variable rate mortgage be a good choice?
It’s not just fixed rates that have improved in the lender rate war and some tracker and discount rates can offer very low rates, slightly undercutting those on corresponding fixed rates. Those that feel there is still a way to go before interest rates start to climb may therefore feel a tracker offers good value.
Secondly, trackers and other variable rate options are far less likely to carry any early repayment charges, which generally apply on fixed deals. These charges tie the borrower in so those that need more flexibility, either to overpay or to keep their options open, will find the freedom of many variable products attractive.
Of course, any borrower that is considering a variable product will need to check that they are well equipped to cope with higher payments, if interest rates do start to climb sooner and/or more quickly than they expected. Looking at the impact of higher rates on the mortgage payment will help a borrower test just how much they value flexibility over security.
It’s unlikely that we will see a big shift from fixed rates towards trackers and borrowers understandably like to know where they stand. However, variable products should not be dismissed and can be a good option for the right borrower.
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