First-time buyers feel the brunt of rising mortgage rates: Will it lead to collapsing chains and house price falls?
First-time buyers are feeling the brunt of rising mortgage rates with some property insiders fearing it could have dire consequences for the rest of the market.
Since the war in the Middle East began, fixed rate mortgages have risen significantly due to inflation fears feeding through into future interest rate expectations.
The average two-year fixed rate for someone buying with a 15 per cent deposit has jumped from 4.8 per cent to 5.89 per cent.
On a £200,000 mortgage being repaid over 25 years, that’s the difference between paying £1,146 a month and £1,275 a month – representing an extra £1,548 over a year.
For those buying with anything between a 5 and 15 per cent deposit, the lowest rates have gone from around 4 per cent at the start of the month to above 5 per cent in a matter of weeks, according to broker L&C Mortgages.
The best two-year fixed rate for someone with a 15 per cent deposit on 1 March was 3.87 per cent, now it’s 5.06 per cent.
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Under pressure: First-time buyers have seen fixed rate mortgages rise by more than 1 percentage point in just four weeks
The best two-year deal for someone with a 10 per cent deposit was 4.1 per cent at the start of the month, now it’s 5.27 per cent.
A similar change has played out across five-year fixed rates as well.
First-time buyers are heavily reliant on mortgages to fund their house purchases making them particularly sensitive to rate hikes.
Nine in ten first time buyers rely on a mortgage to buy their first home, according to analysis by home mover comparison site Really Moving – a higher proportion than any other group.
It found over the past six months, 90.5 per cent of first time buyers used a mortgage to fund their purchase, rising to 92.6 per cent in March – the highest level since October 2013.
‘Expectations that borrowing would become cheaper this year have been turned on their head,’ says Rob Houghton, founder and chief executive of Really Moving.
‘Inflation is now on course to shoot back up and as a result we’re likely to see the base rate rise this year rather than fall.
‘Lenders are spooked and amid the uncertainty we’re seeing hundreds of products being pulled, with rates rising across the board.
‘Anyone hoping to buy this year will be concerned, particularly first time buyers who are most heavily dependent on mortgages.’
David Hollingworth, associate director at L&C Mortgages, thinks the recent flurry of rate hikes will make many first-time buyers pause for thought.
‘Each week sees another sizeable jump in costs and we are now seeing differences that amount to £100 or more per month compared to before the conflict began.
‘You can imagine this will be enough to knock confidence for those that may have been about to mount their search for a new home.
‘Not only will first-time buyers be looking at higher rates wondering whether they can afford the payments, but it is also feeding through into tighter lending criteria meaning they may find they can’t borrow as much either.’
| Deposit | Mortgage amount | Avg monthly cost on 27 February | Avg monthly cost on 31 March | |
|---|---|---|---|---|
| £12,500 (5%) | £237,500 | £1,450 | £1,589 | |
| £25,000 (10%) | £225,000 | £1,325 | £1,466 | |
| £37,500 (15%) | £212,500 | £1,218 | £1,355 | |
| * Based on 25 year repayment term and average two-year fixed mortgage rates as provided by Moneyfacts | ||||
Why this is a problem for the wider property market
Buyer demand is already running below last year’s levels across the first three months of the year, according to Zoopla’s latest data – and this looks set to worse thanks to the recent spike in mortgage rates.
The property portal said demand has weakened further over March, reflecting the impact of events in the Middle East with buyer enquiries 13 per cent lower than a year ago as potential buyers adopt a more cautious, ‘wait and see’ approach.
Rising mortgage rates are not only more likely to make some first-time buyers hold off for now, but it could also put in danger current sales.
This is because most property transactions are in a chain and, if one sale collapses or is delayed, all the others are impacted.
First-time buyers may have secured a mortgage offer at a lower rate, but these tend to last for no more than six months.
This means they could find themselves having to re-apply at much higher rates if their purchase is delayed.
This can happen when there are delays further up the chain, or if buying a new build off-plan, the developer may not finish in time.
There are also some lenders that enable first-time buyers to lock in a rate via an agreement in principle, rather than kickstarting a full blown application. Nationwide is one example.
However, while these can help first-time buyers who are yet to find a property, these typically last between 30 and 90 days and therefore once expired will open people up to the new higher rates.
Craig Fish, director of London-based Lodestone Mortgages says rising rates are hitting first-time buyers hardest.
‘They are entirely dependent on mortgage finance, even a modest rate increase can push affordability over the edge, causing some to pause, reassess, or pull out of purchases altogether,’ says Fish.
‘In some cases, unless vendors are willing to discount, buyers simply have no choice but to walk away and focus on cheaper properties.
‘I’m seeing this with clients right now, and it’s contributing to chain collapses.’
Chains collapse as mortgage offers expire
Jamie Alexander, mortgage director at Romsey-based Alexander Southwell Mortgages says he is seeing chains collapse.
‘Rising rates are acting as a brutal filter for the market,’ says Alexander. ‘We are seeing chains collapse specifically where mortgage offers expire.
‘A 1 per cent rate jump overnight is often the difference between a ‘yes’ and a ‘walk away.’
Knock on effects: If first-time buyers hold off, then this will have knock on effects for the rest of the market
Mark Harris, chief executive of mortgage broker SPF Private Clients is concerned a negative impact could have dire consequences for the wider market.
He says: ‘A plentiful supply of first-time buyers is essential to the overall smooth functioning of the housing market.
‘If they are struggling with higher rates and are forced to pull out of purchases, or delay buying in the first instance, this will have a negative knock-on impact higher up chains and on the market overall.’
However, fewer people looking to buy will result in less competition among those that continue with their home buying plans.
This could enable savvy or brave first-time buyers to snap up a bargain.
‘This volatility is creating a buyer’s strike that actually benefits the resilient,’ adds Alexander.
‘With less competition, those who can still move are in their strongest negotiating position in years.
‘We aren’t seeing a crash, but we are seeing a price correction, smart first-time buyers are trading higher monthly interest for significant discounts on the purchase price. It’s a transition from a seller’s market to a negotiator’s market.’
