After the Bank of England raised interest rates by 0.25 percentage points – pushing the benchmark rate to 4.5% up from 4.25% – representing the twelfth consecutive rise, mortgage lenders are offering new products to help those struggling to borrow money.
The rise will be felt by borrowers as mortgage and loan costs are set to be higher. It will mean that a typical mortgage holder on the standard variable rate will see their monthly bills increase by £35 according to AJ Bell. The rise will be even stronger for the 1.5 million households with fixed mortgage deals set to expire this year. Homeowners with an average 2.58% fixed rate available in 2021 will see their mortgage payments increase by £13,000 a year if they have a £250,000 loan.
Adding to this, many first-time buyers are struggling to get a deal at all.Chairman of Cornerstone Group International, David Hannah analyses three mortgage products looking to help homeowners and first-time buyers to combat rising interest rates.
Zero-deposit mortgage
“Skipton Building Society recently launched a new zero-deposit mortgage aimed at helping first-time buyers and renters get onto the property ladder. The ‘track record’ mortgage is intended to allow people with a strong history of paying their rent on time and in full to buy their first home with little to nothing as a deposit. First-time buyers aged 21 and over may be able to take out a mortgage between 95% to 100% of the value of the property they want to buy, but in return must provide evidence of a minimum of 12 months of rental history.
“The announcement of zero-deposit mortgages will come as welcomed news for those stuck in generation rent, the biggest issue preventing first-time buyers from stepping onto the ladder is saving up a deposit and the introduction of this mortgage offer removes that barrier totally.
“Whilst there are some concerns about this type of mortgage given what happened in the 2008 financial crash, I believe that a lot has been learned since then and affordability tests will be thorough. I also think that the risk of falling into negative equity may only be present for some who buy and sell quickly afterwards – new homeowners that hang onto this home for a number of years should see their asset increase in value.”
Zero-interest loans for green improvements
“Energy bills have increased consistently over the past year, with 2022’s winter price cap being 96% higher than 2021 according to Money Helper. This has caused more homeowners to look at making energy efficient home renovations to save on bills, with Cornerstone Tax 2020’s data showing that 36% of homeowners say that making their home more energy efficient is a priority for them. However, price is still an obstacle for homeowners with Cornerstone Tax 2020’s data showing that 45% have looked into making their home more energy efficient but found it too expensive without financial support.
“From June 1, Nationwide will offer a 0% loan to existing mortgage forcustomers looking to spend up to £15,000 on energy-efficient home improvements. This could provide vital support for those looking to make upgrades such as solar panels or electric car charging points and I think that more lenders could follow suit and copy Nationwide in offering products like this.”
Long-term mortgages
“This is something which could aid first-time buyers significantly. Many are being turned down due to failing a stress test – something which lets lenders know if you can afford your mortgage in the future even if interest rates rise. Long-term fixed-rate mortgages reduce the risk to lenders, meaning that first-time buyers have a higher chance of being accepted for these mortgages. Kensington Mortgages currently has a 40-year mortgage available – the longest currently on offer but as rates are high, taking a long-term mortgage out may not be the best option for first-time buyers.
“By adding years to their mortgage terms, buyers are set to pay significantly more in additional interest over time. Private Finance found 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 mortgages with shorter terms.”
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