The UK property market is facing significant challenges, primarily driven by potential increases in capital gains tax (CGT) and government borrowing, which could impact mortgage rates. Recent discussions around Chancellor Rachel Reeves‘s upcoming budget indicate that a significant increase in government borrowing might be on the table, potentially unlocking up to £50 billion for spending. However, this move raises concerns about rising mortgage rates, as Treasury analysis suggests even a modest increase in borrowing could lead to higher costs for consumers and businesses.

Former Chancellor Jeremy Hunt has warned that increasing borrowing will lead to prolonged higher interest rates, causing financial strain for mortgage holders just as the Bank of England is expected to lower rates. Hunt emphasized that the Treasury officials consistently indicated that increased borrowing would have a long-lasting impact on interest rates, making mortgages more expensive .  See a Government report here.

The Institute for Fiscal Studies (IFS) has also criticized Reeves’ plans, labeling them as “opportunistic.” The IFS highlights the risk that increased borrowing could fuel inflation and compel the Bank of England to raise interest rates further. Carl Emmerson, the IFS deputy director, warned that borrowing for current spending rather than capital investment could heighten these risks .

Market observers are cautiously optimistic about potential changes in mortgage rates, with some rates dropping below 4% for the first time in months. However, any increases in borrowing could offset these gains. Analysts suggest that while some market factors may have already accounted for the potential of increased government borrowing, the overall economic implications remain uncertain. The upcoming budget will be critical in determining the trajectory of both borrowing and interest rates .

For more in-depth analysis, you can read the full articles from The Telegraph and other sources covering these developments in the property market and government fiscal policy