Urgent warning for first-time buyers about ‘financial timebomb’ as mortgage rates continue to soar – are you affected?
FIRST-TIME buyers are being warned about a “financial timebomb” as mortgage rates continue to soar.
Around one in five first-time buyers are taking out mortgages lasting more than 35 years as interest rates rise, according to UK Finance.
Longer mortgage terms can make monthly payments more manageable, but borrowers can end up paying more in interest.
Stretched mortgage terms could also affect some borrowers’ plans for retirement causing a “financial timebomb”.
Steve Webb, partner at pension consultants LCP, said it is likely that many more people reach retirement with an outstanding balance on their mortgage.
This partly due to a high proportion of new mortgages being for 30 or even 35 years as a way of coping with interest rate hikes.
Mr Webb said: “The real danger is that if people have to use up their modest pension savings to clear their mortgage, they will have nothing but the state pension to support them in retirement.
“We urgently need to look at housing affordability and pensions together if we are going to prevent a generation from having a very low standard of living in old age.”
Mortgage rates have been rising as the Bank of England base rate has climbed.
Swap rates, which underpin fixed-rate mortgages, have been fluctuating recently.
The Bank of England is expected to raise the base rate further on Thursday as it grapples with stubbornly high inflation.
If this happens, it would immediately push up costs further for some borrowers on variable rate mortgages.
It comes as the average fixed two-year rate on offer topped 6% for the first time this year.
The rise takes the average rate back towards territory last seen during the market volatility that followed last autumn’s mini-budget.
According to Moneyfactscompare.co.uk, the last time that the average two-year fixed-rate mortgage was 6% or higher was on December 4, 2022.
Around 2.4 million fixed-rate mortgages are due to end between now and the end of 2024, according to figures from UK Finance.
Many of these homeowners could be in for a bill shock when they come to remortgage, having been used to paying significantly lower rates.
According to the Resolution Foundation think-tank, annual mortgage repayments are set to rise by £2,900 for the average household remortgaging next year.
The government is being urged to intervene, but Prime Minister Rishi Sunak told ITV’s Good Morning Britain that halving inflation is the best way to tackle rising rates.
He said: “I know the anxiety people will have about the mortgage rates, that is why the first priority I set out at the beginning of the year was to halve inflation because that is the best and most important way that we can keep costs and interest rates down for people.
“We’ve got a clear plan to do that, it is delivering, we need to stick to the plan.”
If you’re struggling, we’ve put together a full list of mortgage help you can get now.
How to get the best deal on your mortgage
If you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
But there are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or you home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk