Why Stamp Duty changes could spark volatility in the 2025 mortgage market

The UK housing market showed signs of growth in 2024, with Introducer Today stating that there are more mortgage approvals each month, house prices are increasing, and we’re seeing lower interest rates across the board. However, the landscape may be set to evolve with an upcoming Stamp Duty change. 

Stamp Duty is tax paid on property or land purchases over a certain price in England and Northern Ireland, with thresholds for certain values. Different rules apply in Wales and Scotland.

In September 2022, the government announced a change to Stamp Duty, which lowered the upfront costs of buying a home. It increased the nil-rate threshold from £125,000 to £250,000, after which buyers would pay 5% in Stamp Duty. 

The government also raised the threshold for first-time buyers from £300,000 to £425,000. This was originally meant to be permanent, but in the 2022 Autumn Budget, the government announced that the change would revert on 1 April 2025. 

That date is now swiftly approaching, and it could introduce a period of volatility in the mortgage market, particularly for the first half of the year. 

So, find out what could happen in the market as a result of this, and what the mortgage landscape may look like in the coming years.

Changes to Stamp Duty aim to improve affordability for UK buyers

Despite some critics arguing against the coming change to Stamp Duty according to MoneyWeek, the Labour government announced in the 2024 Autumn Budget that the 1 April date would stand. 

Labour’s decision to not extend the Stamp Duty changes aims to address concerns around foreign investment and affordability. 

Currently, and for the last few years, Stamp Duty has been: 

Source: gov.uk

From 1 April 2025, these will be the new Stamp Duty rates: 

Source: gov.uk

Additionally, first-time buyers currently pay no Stamp Duty when purchasing a property worth up to £425,000. After that, they will pay 5% from £425,001 to £625,000. 

However, from 1 April 2025, this will drop to £300,000, where they will pay 5% from £300,001 to £500,000. 

Furthermore, some new rules for Stamp Duty took effect immediately, such as the higher rate of Stamp Duty on purchases of additional properties. This increased from 3% to 5%, effective on or after 31 October 2024.  

The increase in Stamp Duty on additional properties is designed to support first-time buyers and second-home movers get moving on the property ladder. From HM Treasury, Rachel Reeves stated in the Budget: “This is expected to result in 130,000 additional transactions over the next five years by first-time buyers and other people buying a primary residence.”

While this could be a productive measure, it does not account for those who could be locked out of homeownership or moving due to the increases in tax. 

Here’s what could happen in the short term as a result, and what we may see in the coming years.

A rush and then a marked slowdown in the property market

The upcoming change to Stamp Duty is likely to trigger a temporary surge in mortgage applications, which could have a few side-effects. To avoid paying additional Stamp Duty, many buyers may try to accelerate their timelines, leading to a short-term spike in demand. This could put some strain on lenders’ resources and potentially lead to delays in processing applications.

Following this initial rush, we might see the opposite happen, where demand could drop. This could be because those who wanted to buy have already done so, or because those who couldn’t buy now need to wait until they can afford Stamp Duty fees.

We may see lenders adjusting their lending criteria as a result of this drop in demand, and we may also see new products come to market to help alleviate the burden. 

For example, according to Financial Reporter, 95% mortgage options – mortgages where you only need a 5% deposit – could be on the rise. As of 7 January 2025, there were 248 mortgage options available for these high loan-to-value (LTV) mortgage types. 

With affordability potentially changing for many across the country, lenders may be inclined to introduce even more high LTV products to keep buyers moving.

These changes may also see more movement in the new-build market, as many developers offer incentives such as deposit contributions, which could make it easier to afford Stamp Duty. Some developers may even offer to pay the Stamp Duty outright, which could make buying a new-build more appealing for many.

In the medium term, there may be a shift in demand and house price adjustments

The medium-term impact of the Stamp Duty changes could bring about a shift in demand and a change in local house prices. Some areas may see a surge in demand, in which case house prices could rise. In others, there could be a temporary slowdown, which might cause house prices to fall.

There is already a distinct difference in house prices across the country, but time will tell what effect the Stamp Duty changes will have on this already wide disparity.

Even with Stamp Duty reverting back to £300,000 tax-free for first-time buyers, many won’t be affected, as Rightmove states that the average house price for a first-time buyer is £227,191. 

However, in the areas where the changes will be felt, the effect will be substantial. Those buying their next home will likely also feel the change. 

As an example, consider how the new Stamp Duty rules coming in from 1 April could affect the following regions and the tax first-time buyers or home movers would face when buying property:

Source: gov.uk

The new thresholds could increase the upfront costs for first-time buyers, who may already be struggling with affordability. For existing homeowners, the increased Stamp Duty charge could impact their purchasing power, either delaying a move or forcing them to move into a property of a lower value.

This could mean that there are fewer people buying houses and reduced demand could cause house prices to lower. 

That being said, if the Bank of England’s base rate comes down this year as expected, there could be more activity in the UK property market, even with the cost of Stamp Duty increasing. This is because more people will be entering the market, increasing demand, and potentially driving property prices higher.

The result could be a see-saw effect, with highs and lows across the country as buyers and sellers react to changes in the market.

There may be an impact on affordability in the long term 

The long-term effects of the changing Stamp Duty thresholds are up for debate, and it could very much be a game of “wait and see”. But, there are some areas of the mortgage market that may struggle more than others. 

The biggest of these will likely be buy-to-let (BTL) investors and second homeowners. The surcharge for second property holders increased to 5% in October 2024, and when Stamp Duty bands revert on 1 April 2024, it will increase back to 7%. 

This higher band of Stamp Duty could deter BTL investment, which, according to What Mortgage, has already been on a downward trend. This could reduce the supply of rental properties, leading to a tighter rental market and potentially driving up rental prices.

Reduced demand from BTL investors could also slow down the housing market, which may lead to slower price growth. This may work in the favour of first-time buyers and existing homeowners, as rising house prices won’t exasperate Stamp Duty concerns. 

According to Unbiased, the initial Stamp Duty holiday in 2020 did create a surge in house prices, so long-term affordability may, at the very least, stabilise with the coming changes.

Get in touch

The coming Stamp Duty changes could well introduce a period of volatility into the housing market, with an initial rush followed by a period of adjustment. While the long-term effects remain uncertain, all types of buyers could experience both challenges and potential benefits. 

Navigating these changes may require careful planning and extra considerations. A mortgage adviser could help you understand the implications, whether you’re buying your next home or considering getting started as a landlord.

If you’re unsure of how Stamp Duty could affect your future plans, please get in touch via our Contact Us page. We’re here to help, whether you’re aiming to buy before 31 March 2025 or after.