Multiple rate rises have impacted first-time buyers greatly, says UK Finance

11 March 2024 , 09:37

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A typical first-time buyer in 2023 would have needed to stretch their loan out for half a century to achieve the same level of affordability that they would have had across a 30-year mortgage term in 2022, a finance expert has said (Image: PA Archive/PA Images)

Frst-time home buyers are really feeling the pinch from higher interest rates, according to a finance expert.

The head of UK Finance, David Postings, said it is getting tougher for first time buyers. He said: "Affordability is key and after multiple rapid interest rate rises the typical first-time buyer has been impacted greatly."

David Postings told an industry gathering in London that: "We looked at a typical first time buyer in 2022, which was a relatively stable year, and the average mortgage term was 30 years." Then he talked about how much things have changed this year. To keep payments the same compared to what they earn, buyers would need a mortgage that lasts 50 years.

He explained: "But we then rolled forward the average change in house prices, mortgage rates and incomes to the middle of 2023. For that buyer to achieve the same affordability, as measured by their mortgage payments compared to income, they would have needed to borrow over a 50-year term."

Mr Postings added: "As rates rose through 2023 this calculation increased further." He said that a 50-year mortgage isn't something lenders would normally offer, and it's not what they want. But this shows why more people are borrowing money for longer times.

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UK Finance found that there were fewer mortgages given to first-time buyers last year than any year since 2013. The number dropped by 22.4% from the year before. Mr Postings added: "Although lending was down last year, there were still 287,000 loans with a value of £58 billion advanced to allow first-time households to buy their own home."

He added: "It is hard to predict where the market might go next. Demand might pick up a little this year but affordability will likely still be stretched until rates start to drop. We are unlikely to see a return to very low interest rates so house prices may stagnate as incomes gradually rise and equilibrium is reached once more."

A lot of lenders have agreed to a mortgage promise, which gives people who are finding it tough more choices. Banks and building societies are telling customers to get in touch if they need help. Just asking a mortgage lender about what can be done won't make someone's credit score worse.

Because money is tight, more people are falling behind on their mortgages, but Mr Postings said that tough checks on mortagage applications have helped protect both the lenders and the future homeowners.

So, even though more people owe money on their homes, the number is still small compared to the past, he explained. Last year, 4,620 houses were repossessed and Mr Postings reminded everyone that taking someone's home is always the last resort.

He pointed out that, except for the time of the coronavirus pandemic, repossessions are at their lowest since 1980 "and the mortgage market is more than double the size it was then". Mr Postings also remarked that it seems the "pendulum has swung a little too far". He pondered whether the rules around responsible lending are stopping some people from buying homes while trying to safeguard them.

He asked: "Is this causing lenders to be more risk averse than they could be? And what impact is this having on the economy, with lower economic activity resulting from a smaller mortgage market. Whichever party forms the next Government they will have to wrestle with this as they are both looking to economic growth to help provide improved public services. Dampening down the mortgage market has a significant impact on that aim."

However, an official from the Financial Conduct Authority assured: "We want a mortgage market that supports a wide range of people. The reforms put in place after the financial crisis were designed to ensure firms lend responsibly."

"These reforms, alongside a significant increase in early, pro-active support for borrowers, have had a positive impact, with fewer mortgage borrowers in arrears than historic levels, even as interest rates, housing prices and the wider cost of living have risen."

Lawrence Matheson