In­ter­est rise leaves first-time buy­ers fac­ing ex­tra mort­gage bill of £1,000 a year

The Sunday Telegraph - Money & Business - - Business - By Tim Wal­lace

FIRST-TIME buy­ers face an ex­tra bill of £1,000 per year when they come to re­mort­gage as ris­ing in­ter­est rates start to ramp up the cost of bor­row­ing.

The av­er­age buy­ers get­ting their foot on the hous­ing lad­der bor­rowed £145,368 in June, the high­est amount on record, ac­cord­ing to in­dus­try group UK Fi­nance. De­spite the size of the loans, low in­ter­est rates mean monthly re­pay­ments are just £605 on av­er­age, or £7,260 a year. This amounts to only 17.2pc of the buy­ers’ in­come, al­most the low­est pro­por­tion ever. How­ever, ris­ing in­ter­est rates will change this.

The av­er­age buyer fixes their loan rate for three years. Econ­o­mists ex­pect in­ter­est rates to rise an­other three times over that pe­riod, on top of Au­gust’s rise.

If this is passed on to bor­row­ers, their mort­gage rate is likely to rise from June’s av­er­age of around 2.5pc to 3.5pc. This will bring av­er­age re­pay­ments up to £8,232 per year, a rise of £972.

Banks and build­ing so­ci­eties have to test bor­row­ers’ abil­ity to pay back their loans at a much higher level of in­ter­est – around 7pc – so this should still be af­ford­able.

How­ever, it will still be un­com­fort­able as it rep­re­sents an in­crease in hous­ing costs of more than 13pc.

“Just a £23 change in monthly re­pay­ments would be enough to tip one in 10 of Stepchange’s mort­gage holder clients into a neg­a­tive monthly bud­get,” said Sue An­der­son at the debt char­ity. “For house­holds on a tight bud­get, sav­ing may be dif­fi­cult, but build­ing up even a small amount of rainy day sav­ings may make the dif­fer­ence be­tween hav­ing a bud­get sur­plus or not be­ing able to make ends meet.”

The im­pact will be felt on the wider hous­ing mar­ket. “In­ter­est rates for fixed-rate mort­gages will con­tinue to creep up over the com­ing months. And don’t for­get, mort­gage rates only need to rise marginally to have a big im­pact on af­ford­abil­ity, be­cause loan-to-in­come ra­tios are at a record high,” said Sa­muel Tombs at Pan­theon Macroe­co­nomics.

“Ac­cord­ingly, it’s still too soon for a mean­ing­ful re­cov­ery to take hold in the hous­ing mar­ket.”

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