Industry figures from UK Finance show that a record one in five first-time buyers are taking out mortgages of more than 35 years to combat soaring interest rates.
The data shows that 19% of all loans taken out by first-time buyers in March were for terms of more than 35 years – comparing to just 9% in December 2021, when the Bank of England started hiking interest rates. The figures also show that more than half of first-time buyers now take out a home loan of more than 30 years.
Whilst spreading out a mortgage over a longer term will make it more affordable in the short term, it means homeowners will accumulate thousands more debt on the interest over the term of the mortgage. Private Finance shows that if a first-time buyer was to borrow £450,000 over a 25-year term with a 4.5% interest rate and £999 fee, they would pay back £751,000 over the course of the mortgage. If they were to extend the length to a 40-year mortgage they would pay back £972,000 – £221,000 more than the shorter term mortgage.
This comes after nearly 10% of mortgages have been taken off the market due to concerns about increasing interest rates, according to data from Moneyfacts. The figures indicate that approximately 800 residential and buy-to-let deals have been withdrawn, and average rates on two- and five-year fixed deals have also risen. This comes after the Nationwide building society announced that mortgage rates on new fixed deals would increase by up to 0.45 percentage points in response to higher-than-expected inflation figures.
The market is currently difficult to navigate, particularly for first-time buyers as investors now believe the Bank of England will have to increase rates to as high as 5.5% from the current 4.5%, which will impact mortgage rates throughout the UK. The average five-year fixed mortgage for a buyer with a 25% deposit stood at 4.2% in April, but economists predict this will increase back up to 5% in the next few weeks.
David Hannah, Chairman at Cornerstone Group International, discusses the effect of rising rates on the property market.
Hannah said, “I do believe that more measures need to be introduced to aid first-time buyers when looking to step onto the property ladder. We are seeing a new level of unaffordable mortgage rates in the UK property market which is leaving those coming to the end of a previous deal in a dire situation, whilst also making the market increasingly difficult to enter for first-time buyers.
“Even though the average price of a property has predominantly fallen over the past few months, the increase in mortgage rates and the decrease in availability of mortgages are significant problems. We all know the challenges the UK’s property market is currently navigating – inflation and rising interest rates are causing a whole raft of issues, even though we witnessed a fall in inflation last month.
“We’ve seen a surge in building costs and building materials which is slowing down construction and worsening the issue of supply and demand. However, recent data from Rightmove shows that the average estate agent currently has 35 homes for sale compared to 20 last year, showing signs that supply is increasing. Despite rising interest rates, I still see the main obstacle for first-time buyers being the ability to save enough money for a deposit and covering all of the added costs involved in purchasing a property as our data shows.”
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