First-time buyers are set to face an additional £1,000 bill per year when they opt to remortgage as increasing interest rates begin to increase the cost of borrowing.
According to UK Finance, an industry group, last June, the average buyers who are getting their foot on the housing ladder borrowed approximately £145,368, the highest amount recorded. Despite the amount of the loans, the low interest rates mean that monthly repayments are only £605 on average, or £7,260 per year. The number amounts to only 17.2 percent of the income of the buyers, nearly the lowest proportion ever. However, the increasing interest rates will change this.
The average buyer chooses to fix their loan rate for a period of three years. However, some economists anticipate the interest rates to increase another three times over the said period, on top of the increase in August.
Once this is passed on to the borrowers, their mortgage rate will probably increase from the average last June of around 2.5 percet to 3.5 percent. This will then bring the average repayments up to £8,232 per year or an increase of £972.
Banks and several building societies will now have to test the ability of the borrowers to pay back their loans at a much higher level of interest of approximately 7 percent so this should still be affordable.
However, it would still not be comfortable as it signifies a rise in housing costs of over 13 percent.
Debt charity’s Sue Anderson stated: “Just a £23 change in monthly repayments would be enough to tip one in 10 of StepChange’s mortgage holder clients into a negative monthly budget.”
She added: “For households on a tight budget, saving may be difficult, but building up even a small amount of rainy day savings may make the difference between having a budget surplus or not being able to make ends meet.”
The effect will be felt on the wider housing market.
Pantheon Macroeconomics’s Samuel Tombs stated: “Interest rates for fixed-rate mortgages will continue to creep up over the coming months. And don’t forget, mortgage rates only need to rise marginally to have a big impact on affordability, because loan-to-income ratios are at a record high.”
He added: “Accordingly, it’s still too soon for a meaningful recovery to take hold in the housing market.”