Cutting stamp duty could push up mortgage bills, expert warns

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Home buyers may welcome a potential stamp duty cut but they could also end up paying bigger monthly mortgage bills, a finance expert has warned.

Ahead of Chancellor Kwasi Kwarteng’s mini-budget on Friday, The Times reported that radical plans to cut stamp duty are in the pipeline as part of efforts to boost economic growth.

"With demand starting to soften slightly over the past few months, and headwinds anticipated to grow as 2022 draws to a close and we enter 2023, any help to reduce the cost of moving will no doubt be welcomed by buyers if a stamp duty cut is announced on Friday," Rightmove’s property expert Tim Bannister says.

But Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, said potential cuts to stamp duty may risk “doing more harm than good”.

She said stimulating housing market demand could push house prices up further, at a time when the supply of available homes is already tight.

Borrowers could then find themselves paying higher monthly mortgage costs if the price they have had to pay for their home has increased.

Mortgage rates are already on the rise and the Bank of England is expected to hike the base rate further on Thursday, pushing borrowing rates higher.

Ms Coles said: “You can see why the government is concerned about the housing market, because there’s a risk that rising mortgage rates and rising prices will dampen buyer enthusiasm. We know from recent experience that a stamp duty holiday effectively stimulates demand.

“No buyer will ever complain about a tax cut, but if the government was to cut stamp duty it would mean ignoring the fact that the real brake on the property market is a severe shortage of supply.

“By ramping up prices at a time of rising mortgage rates, the end result will be higher monthly mortgage costs, which are going to be increasingly unaffordable."

Rightmove statistics regarding UK stamp duty:

  • The average stamp duty that a home-owner (not a first-time buyer) pays is currently £8,258, based on the average asking price of £365,173, according to real estate company Rightmove.

  • According to the company, if the stamp duty cut was on all properties up to £500,000, it would mean 74% of properties in England would be exempt from stamp duty

Richard Donnell, executive director at Zoopla said: “Changing stamp duty to boost market activity means stamp duty cuts will need to be targeted at homes priced at £500,000 and above – which currently account for 76% of stamp duty receipts.”

A stamp duty holiday introduced by former Chancellor Rishi Sunak came to an end last year. Spikes in demand were seen during the holiday as buyers rushed to maximise their savings.

According to the most recent Office for National Statistics (ONS) figures, the average UK house price leapt by 15.5% annually in July, marking the biggest increase in 19 years.

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The jump in annual inflation was mainly because of “a base effect” from the falls in prices seen this time last year, as a result of changes in the stamp duty holiday, the report said.

The average UK house price was £292,000 in July 2022, which is £39,000 higher than at the same time last year.

Earlier this month, the Royal Institution of Chartered Surveyors (Rics) said average stock levels on estate agents’ books were sitting at a record low of 34 homes per branch, fuelling the upwards pressure on house prices.

Richard Fearon, chief executive of Leeds Building Society, said: “Cutting stamp duty rates across the board would simply be yet another short-term quick fix that ultimately will make the housing crisis worse, not better.

“The prime minister and chancellor rightly want to prioritise growth.

"But they should deliver that in a much more sustainable way by investing in building enough houses, not funding widespread stamp duty cuts. Using the tax system in this way will pump up house prices, which will only exacerbate the problems faced by first-time buyers.

“Governments have successively resorted to quick-fix solutions to increase demand rather than address the structural flaws in the housing market and ensure there is enough supply."

A Treasury press office spokesperson said: "We do not comment on speculation around tax changes outside of fiscal events."