The Bank of England confirmed that it was raising interest rates from 2.25 per cent to 3 per cent in a historic announcement today. The Bank also issued warnings over the UK facing the longest recession in 100 years.
The increase of 0.75 per cent points is the biggest hike in interest rates in more than three decades. Financial experts are expecting it to take the hardest toll on first-time buyers.
Buying a house is already a challenge with average house prices continuing to grow to £268,282 this year, according to the latest Halifax house price index. Many first-time buyers also found it tricky to secure a mortgage, after many were pulled from the market following the mini-budget fallout last month.
‘The era of historically low-interest rates looks to be over, which is making it more challenging for those new first-time buyers who are stretching themselves financially to try and get out of the frenzied rental market and onto the housing ladder,’ says Rightmove’s (opens in new tab) property expert Tim Bannister.
(Image credit: Future PLC / David Giles)
How will the Bank of England interest rate hike impact first-time buyers?
‘First-time buyers will be hit the most by the 0.75 per cent rise in interest rates, as higher rates dent affordability,’ explains Alice Haine, Personal Finance Analyst at Bestinvest (opens in new tab), the DIY investment platform and coaching service.
‘There is also the added challenge of fewer mortgage products to choose from, particularly those with a small deposit, such as 5%, as lenders have pulled a number of products from the market since the mini-budget over concerns about the uncertain borrowing environment and falling house prices, which puts those with a 95% loan-to-value at risk of falling into negative equity.’
(Image credit: Future PLC/Simon Whitmore)
‘With average mortgage rates on the popular two-year fixed product almost triple what they were a year ago before interest rates started rising, buyers looking to step onto the property ladder either need a bigger deposit for their dream house or to downsize their expectations to ensure they can afford the home they want.’
Tim Bannister at Zoopla says we shouldn’t expect to see any significant changes to new fixed-rate deals based on today’s interest rate rise. ‘Compared to the volatility of a few weeks ago, mortgage rates have now started to stabilise and fall. As today’s rise was expected, we don’t think we’ll see any significant changes to new fixed rate deals.’
He also points out that the news shouldn’t scare off first-time buyers, especially if they’re able to secure the best mortgage rates. ‘Mortgage payments will be much more manageable for those first-time buyers who have been lucky enough to save up a bigger deposit of 25%, as they may find that monthly mortgage payments on a typical first-time buyer home are lower than their current monthly rental payments.’
‘It’s important to look beyond the headline numbers, because, while “like-for-like” mortgage costs have been increasing, mortgage brokers and lenders will be able to help people assess the different options available to manage their costs and see if they can afford to move.’
(Image credit: Future PLC / Phil Dunk)
However, if you are looking to purchase a home in 2024, Alice’s advice is to either look to get a mortgage in place soon before mortgage rates grow further or wait (if you can) until they start to come down before investing in your first home.
‘Remember, with interest rates expected to peak at 5% next year, mortgage rates could trend even higher, which will dent affordability even more. The only upside to this is that higher interest rates will reduce demand, something already evident from the 10% drop in mortgage approvals in September.
‘As a result, house prices are expected to drop significantly next year following more than two years of bumper growth, with some anticipating a double-digit drop as the squeeze on domestic spending power from high inflation and high borrowing costs tightens even further.
‘For first-time buyers that have a mortgage offer in place, this could present an opportunity to snap up a home at a lower price. So it might be wise to wait until house prices drop, or until mortgage rates are more favourable before entering the market.’
Alice also adds the sage warning that: ‘With the UK now in a recession, first-time buyers should also consider how safe their job is when making any decision around borrowing as unemployment is expected to rise next year.’