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Will cut to stamp duty do much to house prices and is it a good move?

The stamp duty reduction is one of many tax relief measures introduced by the government in an effort to stimulate the country's economic growth.

The government today announced a massive reduction in stamp duty in a bid to ease the burden on first-time buyers, but experts warn it could have the opposite effect.

The stamp duty threshold for home buyers will rise from £125,000 to £250,000 and from £300,000 to £425,000 for first-time buyers.

The maximum value of a property on which first-time buyer relief can be claimed will also increase from £500,000 to £625,000.

The stamp duty reduction is one of many tax relief measures introduced by the government in an effort to stimulate the country's economic growth.

The stamp duty reduction is one of many tax relief measures introduced by the government in an effort to stimulate the country’s economic growth.

Raising the threshold to £250,000 means a third of all homes currently for sale are now fully exempt from stamp duty in England, up from 7% when the threshold was £125,000, according to Rightmove.

In recent months, the housing market was thought to have weakened as the cost of living crisis and rising interest rates began to dampen demand and activity.

In his statement, Chancellor Kwasi Kwarteng said the move would help another 200,000 people move up the housing ladder, but experts are skeptical that it will be first-time buyers who will benefit from the announcement.

One of the main criticisms of the plans is that the reduction in stamp duties will increase demand, further pushing up house prices due to the lack of supply, thus increasing the financial barrier for first-time buyers.

Anil Mistry, Director and Mortgage Broker at RNR Mortgage Solutions, said: “On the face of it, this looks like a good move.

“However, if that means demand goes up, house prices go up.

“Then the extra money paid for the price of the house will be more than the actual saving in stamp duty. This will also result in a larger deposit and/or a higher mortgage, which means more longer-term interests.

When the government introduced a stamp duty holiday in 2020 to support the housing market, the increase in activity led to a spike in house prices.

Overall transactions in the year through June 2021 were up 19% from the previous 12 months, according to CBRE.

However, activity was concentrated in the most expensive slices of property that achieved the greatest savings from the tax freeze.

Mortgage rates have risen significantly since December last year as the Bank of England takes steps to try to curb inflation

Mortgage rates have risen significantly since December last year as the Bank of England takes steps to try to curb inflation

Additionally, experts point out that the saving will be minor considering the rising cost of mortgages as interest rates continue to rise, and are expected to continue to climb in response to the government’s package of loan cuts. radical taxes.

Tom Bill, head of UK residential research at Knight Frank, said: “What the Chancellor gives, the Bank of England will more than take away.”

“Many buyers will find that the impact of rising mortgage rates will soon overshadow the benefit of reduced stamp duty, which will keep firm downward pressure on prices into next year.”

Viewed this way, the tax cut risks only benefiting homeowners looking to relocate or wealthy first-time buyers looking for properties closer to the top of the market, not those trying to move up the ladder. with cheaper properties that are already overpriced. market.

Five-year fixed-term mortgage rates fell from 2.64% in December 2021 to 4.33% this month following the Bank of England’s most recent base rate hike to 2.25 %.

For a £250,000 property, that means paying an extra £137 per month in mortgage payments, totaling £1,644 more per year.

Rising interest rates are putting additional pressure on first-time buyers who are now facing rising mortgage costs as well as rising house prices

Rising interest rates are putting additional pressure on first-time buyers who are now facing rising mortgage costs as well as rising house prices

Following the stamp duty reduction, which came into effect at midnight on September 23, the maximum saving for first-time buyers is £6,250 as their exemption threshold rises.

While other buyers will save a maximum of £2,500 as the threshold at which stamp duty kicks in is permanently doubled from £125,000, but the rates of the tax have not changed.

James Turford, co-founder of mortgage broker Even said: “Removing stamp duty benefits existing homeowners and provides more buying opportunities for high net worth individuals and opportunistic property investors, not generational annuity. .”

However, with the Purchase Assistance Scheme due to end next month and no similar replacements expected, the reduction in stamp duty will relieve first-time buyers of the overall cost of purchase and may encourage larger owners. downsizing and freeing up space. for families.

Richard Davies, chief executive of Chestertons, said: “With the end of purchase aid, the tax reduction will be particularly significant for first-time buyers who have historically faced difficult market conditions in London.

“However, despite the overall positive gesture of the reduction in stamp duty, the economy could encourage house hunters who had previously suspended their search for property to resume their activity.

“If this additional demand is not met quickly, the tax cut could reinforce the existing imbalance between supply and demand, which would consequently lead to an initial spike in house prices.”

Samuel Mather-Holgate, adviser at Mather and Murray Financial, added: “Over the long term, this will mean higher house price inflation, but first-time buyers would much rather pay a little more for their property than a stamp duty invoice.”

There is also relief in the market that the move is permanent and not another stamp duty holiday.

This is Money editor Simon Lambert says the market is still recovering from the Covid stamp duty holiday and while it may seem counter-intuitive under current conditions, “it’s always a good time to reduce a bad tax”.

Many have pointed out that the reduction does not solve the lack of housing supply on the market that continues to drive up prices and makes it so difficult for first-time buyers to save for a deposit.

Yet in his statement, the Chancellor promised a package of planning reforms and the sale of unused government land and targeted investment areas across the country in a bid to boost housing construction.

Stuart Law, managing director of the Assetz group of property and financial services companies, said: ‘The planning reforms proposed today should therefore be widely welcomed, although we have seen proposals of this nature come forward on several occasions, only for them to be thrown into the tall grass.

Freddie Poser, director of Priced out, added: “The stamp duty is a distorting tax and reducing it will reduce friction in the housing market, but if the government really cares about helping people get on the ladder housing, it must focus on improving the supply”.

“We hope they follow through on their plans for street votes and other changes that will spur new housing construction.”

The best mortgage rates and how to find them

Mortgage rates rose significantly as the Bank of England’s base rate climbed rapidly.

If you’re looking to buy your first home, relocate or mortgage, or are a rental property owner, it’s important to get good independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.

Our L&C powered mortgage calculator can allow you to filter offers to see those that suit your home’s value and level of deposit.

You can also compare different fixed mortgage rate terms, from two-year fixed rates to five-year fixed rates and ten-year fixed rates, with monthly and total costs shown.

Use the tool at the link below to compare the best deals, taking into account both fees and rates. You can also start an online application at your own pace and save it as you go.

> Compare the best mortgage deals available now

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