First-time buyers feel the pain of rising mortgage rates: Will it lead to chain collapse and lower house prices?

First-time buyers are feeling the brunt of rising mortgage rates while some property insiders fear it could have a knock-on effect on the rest of the market.

Since the war in the Middle East began, fixed-rate loans have increased significantly due to fears of inflation being lower than expectations of future interest rates.

The average two-year fixed rate for a buyer with a 15 per cent deposit has gone from 4.8 per cent to 5.89 per cent.

On a £200,000 mortgage paid over 25 years, that’s the difference between paying £1,146 a month and £1,275 a month – which represents an extra £1,548 over a year.

For those buying with anything between 5 to 15 per cent, the lowest rates have gone from 4 per cent at the start of the month to 5 per cent within weeks, according to broker L&C Mortgages.

The two-year fixed rate for a 15% deposit on March 1 was 3.87 percent, now it’s 5.06 percent.

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The best two-year deal for someone with a 10% deposit was 4.1 per cent at the start of the month, now it’s 5.27 per cent.

A similar change occurred across five-year fixed rates as well.

First-time buyers rely heavily on mortgages to pay for their homes, which makes them more vulnerable to rising rates.

Nine out of ten first-time buyers rely on a mortgage to buy their first home, according to a survey by home mover comparison site Really Moving – the highest percentage of any group.

It found in the past six months, 90.5 per cent of first-time buyers used a mortgage to finance their purchase, rising to 92.6 per cent in March – the highest level since October 2013.

‘The expectation is that borrowing will be cheaper this year,’ says Rob Houghton, founder and chief executive of Really Moving.

‘Inflation is on the rise and as a result we are likely to see rates rise this year rather than fall.

Lenders are worried and amid the uncertainty we’re seeing hundreds of products being pulled, and rates going up everywhere.

‘Anyone hoping to buy this year will be affected, especially first time buyers who are heavily reliant on mortgages.’

David Hollingworth, assistant director of L&C Mortgages, thinks the rise in rates will give first-time buyers pause.

Every week sees a huge increase in costs and now we are seeing differences of around £100 or more per month compared to before the conflict started.

‘You can imagine that this will be enough to dampen hope for those who may have been looking for a new home.

‘Not only will first-time buyers look at the higher rates and wonder if they can afford the repayments, but it also involves tighter lending practices meaning they may find they can’t afford to borrow too much.’

Why is this a problem for the broader stock market

Consumer demand is already running below last year’s levels in the first three months of the year, according to Zoopla’s latest data – and this looks even worse due to the recent increase in mortgage rates.

The property said that demand has decreased further in March, reflecting the impact of events in the Middle East with customer inquiries 13 percent lower than last year as customers are more cautious, ‘wait and see’.

Rising mortgage rates can not only put first-time buyers on hold, but can also jeopardize current sales.

This is because most of the sales of the goods are in the chain and, if one sale collapses or is delayed, all the others are affected.

First-time buyers may have found a low-cost home equity loan, but it usually lasts for more than six months.

This means they may find themselves having to reapply at much higher rates if their purchase is delayed.

This can happen when there is a delay in the chain, or if you buy a new design, the developer may not finish in time.

There are also some lenders that allow first-time buyers to close the rate with an agreement, rather than starting a full application. Nationwide is another example.

However, while these can help first-time buyers who have yet to find a property, these usually last between 30 and 90 days, so once they expire they will open people up to new higher rates.

Craig Fish, managing director of Lodestone Mortgages in London, says rising rates are hitting first-time buyers the hardest.

“They are completely dependent on credit financing, and even a small increase in rates can push affordability, causing some to wait, re-evaluate, or withdraw from the purchase altogether,” says Fish.

‘In some cases, unless sellers are willing to lower prices, buyers have no choice but to move on to cheaper goods.

‘I’m seeing this with customers now, and it’s contributing to the collapse of the chain.’

Chains collapse when mortgage payments expire

Jamie Alexander, director of mortgages at Romsey-based Alexander Southwell Mortgages, said he could see the chains collapsing.

“Rising rates act as a brutal vacuum in the market,” says Alexander. ‘We see chains collapsing particularly where mortgage rates end.

‘A 1 percent rate jump is often the difference between ‘yes’ and ‘go.’

Mark Harris, managing director of mortgage broker SPF Private Clients, is concerned that the negative impact could have a knock-on effect on the wider market.

He says: ‘A large supply of first-time buyers is essential to a healthy housing market.

‘If they struggle with high prices and are forced to withdraw, or delay their first purchase, this will have a negative impact on the top chains and the market as a whole.’

However, fewer people looking to buy will result in less competition among those moving forward with their home buying plans.

This can make it easier for smart or brave first-time buyers to get more money.

“This uncertainty creates a consumer strike that actually benefits the conservatives,” added Alexander.

‘With less competition, movers are in their strongest negotiating position for years.

‘We’re not seeing a crash, but we’re seeing a price correction, smart first-time buyers trading high monthly interest for big discounts on the purchase price. It’s a transition from a seller’s market to a negotiation market.’