economic #aGENda 11.07

Our regular roundup of financial news from the last two weeks that's driving the economy

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Disposable income hit for homeowners with fixed mortgage deals about to expire

Homeowners coming off fixed-rate mortgages this year and shifting to a new deal can typically expect to see their disposable incomes shrink by 7%, analysis by a trade association suggests. The expected decrease in the amount of income that households will have left over to spend and save at their discretion is due to a combination of rising mortgage interest rates and the surging cost of living.

UK Finance said it is expecting some upwards pressure on mortgage arrears as cost pressures tighten, particularly among households on lower incomes. According to UK Finance, 1.3 million customers are set to reach the end of their fixed-rate deals this year and, unless they re-mortgage, they will move on to their lender’s standard variable rate (SVR).

A “trends in the economy and lending” analysis paper published by UK Finance said: “On average, we estimate the combined impact of cost-of-living and re-mortgage onto a new deal would result in around a 7% decrease in their free disposable income.”

The impacts vary significantly, depending on when the previous mortgage was taken out, UK Finance said. Five and two-year fixed-rate deals account for around two-thirds of those fixed rates maturing in 2022.

Around 9% of those whose fixed rates are due to end this year, or around 117,000 borrowers, will have less than 10% of their income left over as disposable income after moving to a new deal, UK Finance estimates.

Borrowers brace for bigger interest rate rises

Two senior Bank of England officials signalled they’re prepared to hike interest rates at quicker pace if needed to prevent inflation from becoming embedded, adding to evidence that a half-point move is on the table as soon as next month.

Chief Economist Huw Pill said the BOE’s latest guidance showed a willingness to accelerate their hiking cycle if necessary. That came hours after Deputy Governor Jon Cunliffe said the BOE “will do whatever is necessary’ to prevent inflation from persisting, promising officials “will act and we will act forcefully.”

The remarks are among the clearest signal yet that BOE insiders such as Pill and Cunliffe, who have previous expressed doubts over lifting rates in a 50-basis-point step, may consider such a move in August. The BOE has hiked rates at five straight meetings, so far moving in smaller increments than some of its international peers.

The BOE’s vow in June to “act forcefully” to persistence in inflation “reflects both my willingness to adopt a faster pace of tightening than implemented thus far in this tightening cycle, while simultaneously emphasizing the conditionality of any such change in pace on the flow of new data and analysis,” Pill said in a speech in London.

He also left the door open toward a smaller move, noting that the BOE has “finely balanced” decisions in August and beyond and that there’s a case for operating policy with a “steady hand.” Bold moves,” he said, can disrupt markets.

Pill also said the BOE’s updated guidance was designed to give greater flexibility to its communication and reflected both the uncertainties the BOE face and the likelihood that future decisions may become more finely balanced as officials weigh the competing forces of faster inflation and lower growth.

UK house price rise fastest in 18 years

House prices in the UK rose at the fastest annual rate in 18 years last month as demand – especially for larger homes – continued to outstrip the number of properties on the market.

Halifax, one of the country’s biggest mortgage lenders and part of Lloyds Banking Group, said the market “defied any expectations of a slowdown”, with prices rising year on year in June by 13%, the highest since late 2004.

Prices rose 1.8% compared with May, which was the biggest monthly rise since early 2007. UK house prices surge despite cost-of-living squeeze; Jet2 slams ‘inexcusable’ airport chaos – business live. A typical property now costs £294,845, another record high, as prices continue to rise despite the cost-of-living crisis.

House prices have risen every month over the past year and have climbed by 6.8% so far this year, or £18,849 in cash terms. The supply-demand imbalance continues to be the reason house prices are rising so sharply.

Commentators point out that demand is still strong – though activity levels have slowed to be in line with pre-Covid averages – while the stock of available properties for sale remains extremely low.

Property prices so far appear to have been largely insulated from the cost-of-living squeeze. This is partly because, right now, the rise in the cost of living is being felt most by people on lower incomes, who are typically less active in buying and selling houses.

In contrast, higher earners are likely to be able to use extra funds saved during the pandemic. But most experts believe the housing market will not remain immune from the economic slowdown.

But for now, it is being supported by a “huge shift” in demand towards bigger properties, with average prices for detached houses rising by almost twice the rate of flats over the past year (13.9% versus 7.6%).

Bitcoin drops below $20,000

A spate of cryptocurrency meltdowns have erased tens of billions of dollars of investors’ assets and sparked urgent calls to regulate the freewheeling industry. The price of Bitcoin fell below $20,000 at the end of June, for the first time since late 2020 in a new sign the selloff in cryptocurrencies is deepening.

Bitcoin, the most popular cryptocurrency, fell below the psychologically important threshold, dropping as much as 9% to less than $19,000, according to CoinDesk, a United States-based exchange platform.

The last time Bitcoin was at this level was November 2020 when it was on its way up to its all-time high of nearly $69,000. Bitcoin has now lost more than 70% of its value since reaching that peak (it has recovered slightly to nudge back above $20,000 at the start of July).

Ethereum, another widely followed cryptocurrency that is been sliding in recent weeks, took a similar tumble.

It is the latest sign of turmoil in the cryptocurrency industry amid wider turbulence in financial markets. Investors are selling off riskier assets because central banks are raising interest rates to combat quickening inflation.

Who will HMRC target next?

Sky Sports presenter, Alan Parry, has had his appeal against a £356,420.37 IR35 tax bill dismissed at a First-Tier Tax Tribunal hearing. Parry was contesting that the contracts his limited company, Alan Parry Productions Limited, held with BSkyB between tax years 2013/14 to 2018/19 reflected an employment relationship, rather than self-employment.

But due to the Judge taking the view that Mutuality of Obligation (MOO) existed between Parry and Sky, with the presenter also said to have worked under the control of the broadcaster, it was decided that the engagement belonged inside IR35.

It leaves Parry with a tax bill of £356,420.37, made up of £222,474.40 of Income Tax and £133,945.97 in National Insurance Contributions, although Corporation Tax already paid by Parry will be offset from this amount. The presenter could also appeal again.

The sums alone in this case highlight the staggering cost of getting IR35 wrong. After Eamon Holmes, Gary Lineker, Lorraine Kelly and several others, Alan Parry is the latest in a long line of high-profile presenters caught up in IR35 cases with huge tax liabilities.

Whichever way you look at it, the £356,000 tax bill handed to Parry is a firm reminder of the importance of IR35 compliance – something that contractors and businesses must prioritise. Digging into the details, it seems that the contracts held between Parry and Sky didn’t necessarily reflect the reality of the engagement, which HMRC will likely pay close attention to in the event of an IR35 investigation.

The impact of no-fault divorces so far

New divorce laws caused a 'bulge' in cases this spring as couples sought to navigate the rule changes, new figures reveal. Nearly 13,000 applications were filed in April, and just over a fifth were made jointly - an innovation now permitted under the 'no fault' law.

A similar number also filed for divorce in March, which lawyers put down to a rush of couples already near agreement trying to get cases sorted and financial settlements under way ahead of the rule change on 6 April.

Official efforts to reduce the family court backlog might have played a part too, they explain. Couples can now get divorced within six months of first applying even if one partner is opposed, and the process will be largely online - including the serving of divorce papers by email.

Financial settlements will still be dealt with in a separate and parallel process which can continue after the divorce is final.

The high rate of applications around the launch of the no-fault law compares with the nearly 9,400 cases filed in February this year, and around 8,700 in April 2021, according to figures announced by HM Courts & Tribunals Service.

HMCTS has now started publishing numbers broken down between sole and joint applications, rather than digital and paper ones. Meanwhile, the Law Society warns that the civil law courts are facing delays and backlogs, with 22,776 public family law cases outstanding, and care and supervision cases typically taking 50.4 weeks to conclude.

However, experts have warned speedy 'no fault' divorces could make splitting financial assets like pensions fairly more challenging. The new emphasis on haste could undermine the effective sharing of pension wealth at divorce, according to former Pensions Minister Steve Webb and family law barrister Rhys Taylor, who earlier this year published a joint paper warning of the pitfalls.

They say financial orders are only made in around one in three divorces, and not all of these orders cover pensions. They add that research indicates divorced women in particular often end up with very low pensions in retirement and are concerned the new process could make matters worse.