Industry updates

How First-Time Buyers Can Navigate Spiraling Interest Rates

November 4, 2022

In October, 2022 the average 2-year fixed rate mortgage exceeded 6% for the first time in 14 years. A quarter of mortgage products have been pulled by banks and building societies in recent weeks, after a fall in the pound prompted forecasts of skyrocketing interest rates.

In this blog we’re here to help you understand this volatile situation and strategise your way to home ownership.

Is this good or bad news for first time buyers?

Naturally, high interest rates and fewer mortgage products will make it more difficult for many first-time buyers to afford a home. It will also impact how much a buyer can afford as higher monthly repayments combined with high energy and food prices may simply price some buyers out of the market.

The table below outlines how your repayments would change if you had a £200,000 mortgage at a fixed rate over a 25 year term, based on rates increasing from between 2% to 6%

Source: RightMove, September 29, 2022

With the historical period of low interest rates coming to an end, many homeowners are looking at monthly repayments increasing by £400-£500. However, there is a glimmer of hope. These rising interest rates could prompt landlords to sell up rather than remortgaging, which could lead to a temporary rise in the number of properties becoming available – good news for prospective buyers.

If you’re in a position to buy, check out our article from last year about how to avoid common pitfalls in buying a house.

How will this affect borrowers with poor credit?

Homeowners with high debt levels or who may have missed repayments on credit are likely to struggle even more to find a lender who will take them on. Many of the home finance products which have been withdrawn were offered by smaller, more specialist lenders.

If you’re concerned about your chances of finding a lender, you can get some advice with our blog on how to maintain a good credit score.

It’s still possible to find lenders who are willing to offer home finance to borrowers with poor credit but there will be fewer options.

So what can you do about it?

1. Do your research

If you’re looking for home finance, it pays to shop around. Using price comparison websites like Money Saving Expert and Compare the Market, as well as reading advice from lenders will help you to find the best deals and anticipate changes such as longer-term mortgages coming on the market.

Over recent months, first-time buyers are finding that a product is pulled off the market before they have a chance to apply or even - in some cases - after they’ve pursued the purchase of a property with an existing Decision in Principle.

This is due to an overwhelming number of applications and/or lenders suspending new business to allow them time to assess the impact of market fluctuations. This is the frustrating result of the rapidly changing economic situation and the demand from homeowners trying to re-mortgage before interest rates might climb any higher. To avoid the frustration of searching yourself you might want to…

2. Get a mortgage adviser

To take the stress out of finding the best mortgage for you, you can hire a mortgage adviser to find the best options and liaise with the lenders. Some mortgage brokers even offer their services for free as they get paid a fee by the mortgage lender instead.

If your chosen broker does have a fee, you can expect to pay £300-£600 for the service, with the average cost in the UK currently sitting at £500, according to the Money Advice Service. However, the cost of the service varies depending on where you are based, the complexity of your situation and whether you opt for a fixed fee, percentage, or hourly rate (a fixed fee is usually cheaper overall).

It’s best to choose a vetted FCA regulated mortgage professional, so you know they have the relevant expertise.

3. Wait for better rates

If you’re not in a hurry to buy a house, or if you’ve been offered an alternative housing situation such as staying with family or moving into an affordable rental, you might decide to wait until the interest rates stabilises.

If you’re lucky enough to be in this situation, you may find that the market is more positive down the line. However, by delaying your purchase you run the risk of seeing interest rates continue to rise without a significant drop in house prices, making it even harder to get on the property ladder. You can explore your options by reading our blog on the pros and cons of renting vs buying.

4. Opt for a fixed rate mortgage

To gain more security and peace of mind you can opt for a longer-term fixed rate mortgage. This means that if interest rates continue to climb you won’t have to pay a penny more until your fixed term comes to an end.

This is an increasingly popular strategy, with lenders starting to offer 10, 15, and even 20-year fixed rate mortgage products. If peace-of-mind and predictable monthly repayments is a priority for you, StrideUp has a new 10-year fixed term product that might suit your needs that you can speak to our advisors about.

What’s the future for mortgage rates?

The Bank of England is predicting high and rising interest rates until at least July 2023. Industry voices are expecting that the Bank of England base rate will rise to over 4% by the end of 2022 and climb to 5.5% by July 2023.

Mortgages that are not fixed are tied to the base rate in one of two ways: tracker mortgages are directly paired to the BoE base rate while Standard Variable Rate (SVR) mortgages are set by the lender and closely related to the base rate. This means that mortgage costs for existing SVR mortgages and new mortgage products are likely to go up considerably.

The base rate is set by the MPC, a nine-person committee within the Bank of England that decides the interest rate based on 18 economic factors. They meet every six weeks to decide if the rate will increase, decrease or stay the same. In an unprecedented move, in September the MPC increased the base rate for the seventh consecutive time to 2.25%.

In this rate environment, the key factor for first-time buyers is an understanding of the various pros and cons of different home finance products.

In response to the current trends, StrideUp has expanded its product range in order to provide more flexibility to our customers. If you’d like to discuss any of our new 10 year fixed, 2 year tracker and 2 year fixed product, head over to our main site to chat to a team member on messenger

If you stop paying your home finance repayments, your home may be repossessed.

Related articles