How rising interest rates are impacting the property market

Mortgage rates have gone up as the Bank of England has been steadily raising interest rates in an effort to tackle high inflation.

Longer mortgage terms for first-time buyers

First-time buyers are among those hardest hit by escalating rates. New industry data shows that growing numbers of first-time buyers are taking out longer mortgages to help make the soaring costs of buying a home more affordable.

A record 19% — around one in five — of all home loans taken out by first-time buyers in March were for terms of 35 years or longer. More than half had a term of at least 30 years.

A year earlier, in March 2022, just under one in 10 (9%) first-time buyers were taking on mortgages lasting more than 35 years. The proportion moved into double digits in June 2022, when it hit 10%, and has continued to climb.

Extending the term of a mortgage is one way of lowering monthly repayments. However, over the lifetime of the loan borrowers will pay significantly more interest and could still be paying it off into their retirement.

Rates rising further and choice falling

In the past few weeks, mortgage rates have risen further after data showed that inflation is not coming down as quickly as expected.

Recent inflation figures from the Office for National Statistics (ONS) showed a much smaller decline than most analysts had forecast, leading to speculation that the Bank of England will raise interest rates again.

An average two-year fixed-rate mortgage deal now costs £35 a month more than just a few weeks ago, according to Moneyfacts data reported by BBC News.

Moneyfacts’ latest market analysis reveals that the average two-year fixed rate on a £200,000 mortgage with a 25-year term is 5.64%, compared with 5.34% before the inflation data.

Meanwhile, mortgage availability is shrinking as lenders reassess their offerings. As of the end of May there were 4,995 mortgage deals on offer, down from 5,385 a week earlier.

House sales down as mortgage costs rise

Rising mortgage rates deterred some buyers in April, figures from HMRC suggest, with the number of residential property transactions resuming a downward trend following an increase in March.

The provisional seasonally adjusted estimate of residential transactions in April 2023 is 82,120, down 8% from March and a drop of 25% compared with the same month a year ago.

Transactions are now at their lowest level since October 2021.

Subdued outlook

Housing market activity in the UK is likely to remain “subdued in the near term”, says Nationwide.

The building society found that average house prices in the year to May fell by 3.4%, the biggest decrease since July 2009.

Prices also edged down by 0.1% from the previous month, taking the average property price to £260,736.

Average house prices are 4% below their August 2022 peak.

“While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time, especially if mortgage rates moderate once Bank Rate peaks,” said Robert Gardner, Nationwide’s chief economist.

Advice can help you find the right deal

“Borrowers searching for a new deal may well be concerned about the latest developments in the mortgage market,” said Rachel Springall, finance expert at Moneyfacts.

With average rates around 5% for a fixed deal, compared to around 3% a year ago, she stressed that prospective borrowers should seek advice to find a mortgage that suits their needs.