Over the past eight months, there has been a series of interest rate hikes as the Bank of England battles to bring inflation under control. Inflation has soared to its highest level in four decades and continues to rise. As of August 2022, the base rate has risen from 0.25% in December last year to 1.75%, with further increases inevitable. In addition, the rate hikes are being fuelled by the central bank’s forecast of an extended recession that could last longer than a year.
As a result of the rising interest rates, many first-time buyers are now having to take out longer-term mortgages, costing them thousands of pounds more than previously. Many desperate to get onto the property ladder are now taking out mortgages that will take far longer to repay, with the average mortgage term hitting record highs of 30 years in June.
The data comes from UK Finance, with officials stating that there are several contributory factors, including rising interest rates, soaring inflation, and higher house prices.
Keeping monthly repayments down
One of the key reasons first-time buyers are going for longer-term mortgages is to keep monthly repayments down in the face of rising interest rates. By choosing a longer mortgage term, they will pay less each month but will be making repayments for longer and pay a fortune in additional interest.
Another reason longer mortgages are more attractive is soaring property prices, which have boomed since the beginning of the Covid-19 pandemic. This was partly due to a rise in demand for more space due to the various lockdowns during the height of the pandemic.
According to figures from Nationwide, house price growth jumped from 10.7% in June to 11% in July, taking the average property price to £207,209. Separate figures from Rightmove showed that first-time buyers are spending an average of nearly £225,000 on a property.
Last month, Boris Johnson discussed the potential for mortgages spanning 40 – 50 years, which homeowners could then pass down from generation to the next. He believed that this could help to boost the property market in the UK.
Pressure continues for homeowners
The pressure on homeowners and buyers is set to continue, as the Bank of England has predicted that around 40% of mortgages will go up over the coming year due to continued rate hikes.
Officials from CMC Markets said, “The Bank explained that the rise in interest rates was necessary due to external pressures which are expected to persist. This means that British firms and residents will continue to feel this weight reflected in rising domestic prices, wages outpaced by soaring inflation, and even higher mortgage repayments, despite the Bank’s attempt to widen the borrowing pool through less restrictive mortgage rules.”