Rising Mortgage Rates Will Impact First-Time Buyers

According to Zoopla‘s latest House Price Index, 35% of all transactions in the housing market this year were made by first-time buyers. But rising mortgage rates will soon start to bite and impact this group of buyers.

Currently, the property market is driven by first-time buyers and higher income households. With people still looking for more space and are able to look in cheaper areas, as they don’t have to commute to the office every day any more.

Despite the recent rises in interest rates – the latest raised the base rate to 1.75% – first-time buyers are still racing to get on the property ladder.

Zoopla reports that in July 2022, 46% more first-time buyers were interested in buying their first home. Many trying to get onto the property ladder before mortgage rates make it unviable.

Low Income Households Hit First By Cost-Of-Living Crisis

The property portal suggests, that only homebuyers with higher incomes are able to still afford to buy, as the rising living costs squeeze budgets of lower income households.

7 in 10 new property sales with a mortgage are by the middle class, which is in the upper income bands. According to Office for National Statistics data, people on higher incomes are not yet forced to adjust their spending too much.

Many may be surprised that the property sales market is not weakening faster given the cost of living crisis, rising base rates and sharp drop in consumer confidence. However, as homebuyers often tend to be higher-income households with more disposable income, it’s likely they’re not yet feeling the effects of increased living costs.

Zoopla House Price Index August 2022

However, rising mortgage rates will soon impact first-time buyers from higher income groups. It is forecasted that mortgage rates will rise to 4% during this year.

A move to 4% mortgages means, first-time buyers on average have to find an additional income of £12,250, compared to 2% mortgages.

In the most expensive market, London, this is an increase of almost £35,000. However, in cheaper markets, the increase is only £6,000.

This will make it difficult for first-time buyers, on lower incomes, to afford a mortgage for the amount they would need to buy a home that meets their needs.

To keep monthly mortgage payments to an affordable level, first-time buyers will practically have to double their deposit.

But this will only be possible, if they were able to save money in the past two years, which is more likely if they are on higher incomes.

During the past year, in which the cost of living has risen sharply, many people had to use their savings to absorb rising costs.

Despite buyer demand still being high, it has started to decline and is now only 17% above the five-year average. However, it has declined by 37% from its highest level in May this year.

Zoopla predicts that buyer demand will continue to fall throughout the rest of the year.

As inflation, energy bills, costs and mortgage rates rise, even higher income households will be unable to afford to buy a house.

House Prices Not Expected To Fall

While Zoopla expects challenging times ahead for the housing market, the property portal thinks the current property market is resilient enough not to collapse.

Despite rising mortgage rates, living costs and inflation, Zoopla only expects a slowdown in house price growth in the second half of 2022. But not a widespread fall in property prices, as long as the mortgage rates peak at 4%.

The primary risk remains in further increases in the base rate in order to control inflation, which will have a knock-on impact on mortgage rates. The higher rates move above 4%, the greater the impact on prices and sales volume and where homeowners have plenty of equity to cushion any future price falls.

Richard Donnell, Director of Research at Zoopla

The reason for this more optimistic outlook is the gradual rise of costs, rather than a sudden one. House price inflation and sales volumes tend to be hit if consumers have to adjust to sudden rises.

But with many people being on fixed mortgage rates, they won’t feel the impact of rising mortgage rates yet.

Zoopla also points out, that mortgage affordability tests are laid out so that applicants have to prove they can afford to repay a 6.5% to 7% mortgage rate, even if the actual rate is only 2%.

This will help to limit the impact of financial pressures on house prices and sales volumes.

So while higher mortgage rates will have an impact on first-time buyers and the housing market in general, Zoopla thinks that the housing market is resilient enough to cope with the headwinds it is facing.