UK mortgage rates are soaring: Here’s what you need to know as a first-time buyer

Mortgage products have been pulled, payments are doubling and lenders are backing out of agreed deals; concern and uncertainty among Brits trying to buy a home skyrocketed last month after Finance Minister Kwasi Kwarteng announced his “mini-budget.”

His controversial plan foresees swooping tax cuts and more relaxed rules and regulations for businesses. While the cost-of-living crisis in the U.K. continues, Kwarteng argues his budget will boost growth. Critics say that it will mostly help the rich and make the U.K. more unequal.

The mini-budget did have one positive for those trying to buy a home: Stamp duty, a tax many buyers have to pay when purchasing property, was reduced.

Only people whose property is worth more than a certain threshold pay stamp duty, and for first time buyers this was already set at a higher level than the average U.K. property price before the mini-budget came into effect. The changes therefore don’t impact a lot of first-time buyers.

While the cuts will benefit some buyers, any gains might be erased by other rising costs, explains Paresh Raja, CEO of financial services firm Market Financial Solutions.

“The cuts to stamp duty […] will definitely help. Unfortunately, a number of other factors are simultaneously making their lives harder: namely, inflation, interest rates and mortgage market disruption,” he told CNBC Make It.

Francis Gill, a financial advisor at London-based firm Humboldt financial, has a similar opinion.

“For people who were very close to being able to afford a purchase, but were still saving for stamp duty costs, this is a win and they should be able to bring forward their purchase date. However, what they have saved on SDLT [stamp duty] will likely be eaten up on higher mortgage rates pretty quickly,” he said.

The housing and mortgage sector has been especially affected, with lenders pulling hundreds of mortgage deals or pricing them at a much higher level after sovereign bond yields and Bank of England rate expectations both surged. This pushed up costs for borrowers as the BOE’s base rate helps price all sorts of loans and mortgages in Britain.

According to Moneyfacts data, the average rate for a 2-year fixed mortgage surpassed 6% this week — up from 2.25% just a year ago. This could go up even further, Nicholas Mendes, a technical mortgage manager at mortgage broker and advisor John Charcol, believes.

“With lenders costs increasing, volatile economic outlook, and factoring in service levels and future rate rises expect, we could be seeing average rate of 7% in the new year,” he said.

Many borrowers and soon-to-be borrowers are already concerned that they will not be able to afford their mortgage payments, which are set to more than double in thousands of cases. Research and expert advice are therefore key for anyone looking for a mortgage deal right now, Gill explains.

“Make sure your credit score is accurately reflected, make sure they speak to an independent broker, consider fixing for a period {…] and consider any Early Repayment Charges,” he suggests.

“Speaking to someone who can expertly analyse their situation is key. Really, really consider if the rates are this high in 2/3 years, (however long they may be considering fixing for) whether the mortgage is affordable,” he adds.

Markets are expecting a “difficult 12 months,” Mendes explains. Lenders could increase rates further and the mortgage base rate could rise, while a recession and the cost-of-living crisis are likely to put pressure on homeowners, he says.

But it might not all be doom and gloom as the next year unfolds.  

“Property prices are expected to drop in 2023, likewise we are expecting rates to fall slightly from the highs they are today,” Mendes explains.

Raja believes markets could stabilize, or at least be less of rollercoaster ride compared to the last two weeks. “The lending market will calm down after this particular turbulent period. We will not continue to see such fluctuations in rates or products being pulled,” he said.

This would at least ease some of the uncertainty homeowners are currently facing.

For people trying to get onto the property ladder, the chaos might even have some long-term silver linings as others are forced to leave the property market, Gill points out.

“There may be an opportunity if a lot of buy2let landlords leave the market, for there to be an influx of properties for sale and prices come down, they may actually now be able to get on the ladder,” he believes.