Higher mortgage rates will put further pressure on first-time buyers. Future increases to the Bank of England Base Rate (BBR) will cause even more of a squeeze, according to Moneyfactscompare.co.uk analysis.
Low deposit buyers charged over 6% on their mortgage. Those with a 5% deposit will find the average rate has breached 6% this month, five-year rate is now 6.07%.
Borrowers with 5% deposit borrowing £250,000 over 25 years will pay almost £600 more in repayments on the same loan versus those with a 10% deposit, based on the average five-year fixed deals at 95% and 90% loan-to-value (LTV) of 6.07% and 5.75%.
The Moneyfacts Average New Mortgage Rate stands at 5.59%, up from 5.47% at the start of July and remains higher than at the start of March at 4.90%.
Mortgage rates can rise and fall regardless of changes to BBR. Since the start of this week, big high street banks including Santander and HSBC have increased both on sale fixed rates and tracker rate deals, following Lloyds Bank doing the same last week. Lenders have been passing on higher mortgage costs due to volatile swap rates, amid prolonged tensions in the Middle East.
A BBR rise of 0.25% would increase mortgage payments by around £450 a year, a 0.50% rise would result in an increase of around £900, based on the overall average five-year fixed rate mortgage across the market, spanning across the LTV sectors, of 5.66%.
Locking into a fixed deal is cheaper than falling onto a revert rate. The average standard variable rate (SVR) stands at 7.13%. The highest recorded was 8.19% during November and December 2023.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said:
“Interest rates are expected to stay higher for longer and those who delay locking into a fixed rate mortgage could pay the price. The cost of living is expected to worsen in the coming months which puts pressure on the Monetary Policy Committee (MPC) at the Bank of England to consider a rate increase. Despite fixed rates rising in recent weeks due to swap rate volatility, it is still worth moving off an expensive revert rate to a fixed deal, as borrowers could save around £2,800 a year moving onto a five-year fixed rate*. A base rate tracker mortgage might look appealing due to the slightly lower rates currently on sale, but even these have seen rates rise over the past couple of weeks, and if BBR rises, these borrowers will immediately be hit by higher repayments.
“Locking into a longer-term fixed deal for more peace of mind could shield borrowers from future rate rises. An interest rate rise of 0.25% would increase repayments to around £450 a year, and a 0.50% rise would result in a rise of around £900, based on the average five-year fixed rate of 5.66%, on a typical mortgage of £250,000 over 25 years. This demonstrates how indecisiveness can cost borrowers who don’t secure a fixed deal. This will also worry new buyers who have a small deposit, as the average five-year fixed mortgage rate at 95% loan-to-value recently rose above 6%, now at 6.07%.
“First-time buyers who can save a 10% will not only have more purchasing power, but they will also widen the choice of cheaper mortgage rates. Those who borrow £250,000 over 25 years will pay £600 less on their mortgage per year, compared to the average rate available to borrowers with a 5% deposit, on a five-year fixed deal. However, borrowers may not even be able to stretch their savings to a 5% deposit, due to the lack of affordable housing. In fact, over recent months, lenders have worked hard to launch deals designed for first-time buyers, such as the 98% loan-to-value options available from lenders like Leeds Building Society and Santander, or those that only require a small deposit of £5,000, such as Yorkshire Building Society and Lloyds Bank. Seeking advice from a broker is essential to navigate the mortgage maze and understand lending criteria, particularly how much someone can borrow based on their salary and the fact that higher loan-to-value options can exclude new build properties. Borrowers who apply direct for a loan could face disappointment without good guidance.”
