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When the government announced a permanent cut to stamp duty for home buyers in England and Northern Ireland back in September, its aim was to get the housing market moving. It was the second time the government has cut stamp duty since July 2020, with making homes more affordable for first-time buyers a key concern.
“Stamp duty is regarded as a brake on the housing market, a cost to doing business and something that slows the selling process down,” says property expert Henry Pryor. “Paid by buyers, it is also something that weighs down on affordability adding to the sizeable deposits that are required.”
However, the latest stamp duty cut has now been changed to a temporary measure. In his recent Autumn Statement, Chancellor Jeremy Hunt announced that from 1 April 2025 the threshold at which first-time buyers don’t have to pay stamp duty will revert back from £425,000 to £300,000 and the maximum value of a property it can be claimed on will reduce from £625,000 to £500,000.
For existing homeowners, the stamp duty change increases the residential nil-rate tax threshold from £125,000 to £250,000.
Its short-term nature, alongside higher mortgage rates and the cost-of-living crisis, may mean that stamp duty cuts alone fall short of helping significant numbers of buyers to get on the property ladder. There have been concerns that by sparking greater demand, cutting stamp duty could further fuel house price rises and make it increasingly more expensive to buy a house.
Latest figures from the UK House Price Index show that, on average, UK house prices rose 9.5% as of September 2022, compared to the previous year.
Concerns about housing affordability
Homeownership remains an important milestone for many living in the UK, but the lack of affordable homes is a major issue.
In England alone, 65% of an estimated 24 million households were owner-occupiers in 2020/21. This remains the same as the previous year and only slightly up from 63% in 2015/16, according to the government’s English Housing Survey 2020-21.
One factor that has made homeownership more challenging has been high house prices. Not only have average UK house prices increased by 9.5% in the year to September 2022, but this means that the average UK house price stands at £295,000, £26,000 higher than a year ago.
As house prices continue to escalate, so too has the cost of getting a mortgage. The Bank of England increased its Base Rate eight times between December 2021 and November 2022 from 0.1% to 3%, raising the cost of borrowing.
Are stamp duty cuts an effective way to make housing more affordable?
While a temporary cut to stamp duty will reduce some of the costs associated with purchasing a property, there are doubts that this measure goes far enough to make a real difference.
“Cutting stamp duty helps, but this is small fry compared to having low mortgage rates and a good range of high loan-to-value products on offer,” says Paula Higgins, chief executive of advice and campaign group HomeOwners Alliance (HOA).
“The raising of the threshold from £300,000 to £425,000 for first-time buyers was long overdue. Our research into the impact of rising house prices on stamp duty showed that a third more first-time buyers are having to pay stamp duty than they were five years ago,” she adds.
For many buyers, any savings made from the stamp duty cut is likely to be outweighed by more expensive property prices and mortgages.
“The changes to stamp duty will be seen as helpful for first-time buyers but they won’t make homes cheaper,” says Pryor.
What could be done to make homes more affordable?
A long-term solution to make property more affordable would be to build new homes. The government has pledged to build 300,000 new homes a year by the mid-2020s, but it hasn’t kept up with the target – a situation exacerbated by disruptions to the construction industry during the pandemic.
“There are only one or two ways that homes can become more affordable, the most obvious of which is to build more homes,” says Pryor. “Since this is unlikely to happen anytime soon, we must expect homes to remain unaffordable for millions of people. Although in the short term we expect house prices to fall, this doesn’t mean that they will be more affordable. Higher borrowing costs will make them feel just as expensive.”
A more radical strategy would be to abolish stamp duty altogether.
“This would help all first-time buyers, especially, as it enables upsizers to move more easily and free up suitable properties,” explains Higgins.
With the introduction of 50-year mortgages to the market, some buyers may consider taking out a longer-term mortgage to help make their monthly repayments more affordable.
David Hollingworth, associate director at L&C Mortgages, says: “Extending the term out to as much as 40 years helps to reduce the monthly mortgage payment on a repayment mortgage. That can help give a first-time buyer some breathing space in their monthly payments when taking on a bigger mortgage. That could be particularly useful in the early years and could be reviewed as circumstances change, as there is a cost implication to taking a longer term.”
Hollingworth continues: “As the mortgage takes longer to be repaid and is reducing at a slower rate, there will be more interest to pay over the life of the loan. That can easily amount to tens of thousands of pounds in extra interest over the whole mortgage term.”
It’s also important to consider how being locked into a 40-year fixed-rate mortgage could disadvantage you if either the mortgage market or your personal circumstances change. In addition, you may only be able to select from a limited number of lenders.
While stamp duty cuts and the introduction of longer-term mortgages over the past couple of years may offer some financial relief they are not a silver bullet to solving housing affordability in the UK. Addressing the supply of affordable housing and making rates for mortgages more affordable are what is needed to improve access to the property market and mobility for those looking to move home. Disclaimer: The content of this article doesn’t constitute advice, but as guidance and commentary on the mortgage market.
Image source: Getty Images
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