House prices, mortgage rates and interest rates have been the topic of conversation for many in recent months, and it’s easy to understand why. In the last few years, house prices have risen considerably, with the average house price in Great Britain in 2023 hitting a very respectable £362,438 (source: The Times).
We caught up with Scott Richford, Mortgage and Protection Adviser at Mortgage Advice Bureau, to gauge his responses to the top 10 most commonly asked mortgage questions.
Q1: What’s the one piece of advice you’d give to anyone looking to buy a new home at this current time?
A: The first thing to determine is the mortgage repayments that you can afford based upon your income and outgoings. Make a list of what is coming in in terms of income and what is going out in terms of financial commitments and fixed costs, and this should help you to identify what you can afford to spend on your mortgage each month. This will drive the amount of mortgage that you should be looking at and also the purchase price that you should be considering. A specialist mortgage broker should also be able to help you with this.
Q2: What do mortgage lenders look at when assessing your application?
A: Lenders look at things like your credit score and history, income and outgoings. The interest rate environment is yet to fully settle, and lender affordability calculations and stress testing will dictate how much you can borrow based on your income, outgoings and your previous attitude to debt. A specialist mortgage broker can help you with this.
Q3: How long should someone fix their mortgage for at this time?
A: This is really dependent upon your individual circumstances. Rates are predicted to increase over the next 2 years and they then may begin to reduce as inflation comes under control, but you may wish to fix for longer in order to provide repayment stability.
Q4: Is it a good time to buy?
A: Generally, a house purchase is to facilitate a need, such as a first home together, a new purchase to accommodate a growing family or a new purchase due to relocation, so this will be the biggest consideration whether to buy. Interest rates have increased, but to put it in to perspective, the average long term bank base rate over the last 40 years is 6%, and there are offers out there currently at below 4%. If it is affordable then I would suggest that this is still a great time to be looking at property, not as a short-term investment to make a profit (although this is always nice) but as a long-term piece of your life goals, creating equity over the years that you can move on to a new property in the future.
Q5: Will my mortgage definitely go up, and can you explain how it will affect me depending on my mortgage and situation?
A: If you’re currently on a fixed rate then your payments will stay the same, if you have applied for a fixed rate and the mortgage hasn’t started yet, as long as the offer doesn’t run out then you will have that deal, regardless of the rates changing. If your fixed rate is due to be up in the near future (3-6 months) then it is definitely time to have a chat with an independent broker who can look at the best options for you, both with your existing lender and others. You do not want to drop on to your lender’s Standard Variable Rate (SVR), as this will be higher than many deals. If you’re on a discounted or tracker mortgage, then these deals will change as the bank of England or your lender’s SVR rate changes. If these rates go up by 1% then your rate goes up by 1%. Some deals allow you to switch to fixed rate without penalties, some you will have to wait until the term of the tracker or discounted deal is up, so it’s best to consult your original mortgage offer and then speak to an independent adviser.
Q6. What are the advantages and disadvantages of getting a longer-term mortgage, such as a 40-year mortgage?
A: The immediate advantage of a longer-term mortgage such as a 40-year term, is that your payments will be lower. This can help mitigate some of the increase in monthly payments that people will have seen because of higher interest rates. The disadvantage of this is that over a longer term you will pay more interest. I personally am a big advocate of looking at longer term deals for first time buyers where appropriate for affordability, as with being young there is sufficient time for salaries to increase and therefore affordability to increase and for the term to be reduced.
Q7: How will the new interest rates affect those with or looking to get a home with a 95% mortgage, such as the Deposit Unlock scheme?
A: Deposit Unlock allows you to buy a new-build home with just a 5% deposit, whether you’re a first-time buyer or moving home. Those people who already have an application submitted will have the rate already confirmed and this will not be affected by the recent rate rises. New products will have been repriced and it is down to speaking to your adviser to see how affordable the payments may well be – 95% mortgages are difficult to achieve, and rates have always been higher at this level of deposit – however the deals remain competitive as lenders do want to support this area. Builders have been at the front, providing this scheme for their clients in order to help facilitate new deals in the market – the scheme costs the builder for each one they do but this shows the commitment to the scheme and helping people get on to the housing ladder.
Q8: How can I access better interest rates, both as a first-time buyer or someone who already owns their own home?
A: In short, the higher the level of deposit, the better the interest rates. First Time Buyers should be taking advantage of Lifetime ISAs, as you can save up to £4,000 a year, and the government will top this up with a 25% bonus on what you have saved. This will certainly help towards saving for a deposit. In addition, you can look to family members who may be able to help with a gifted deposit. Lenders will be happy to accept this in most cases. There are even mortgages that allow your parents or other family and friends to help towards a purchase and buy a ‘share’ of your property – enabling you to get on the property ladder. They can opt to not charge you interest and can even gift the share later. However, these can be highly specialised and complicated lending tools and should always be recommended by a broker.
Q9: Do you envisage house prices dropping?
A: There is still a supply issue, with many more people wanting to buy than there are houses on the market, and this is underpinning house prices. Rents are also increasing so you need to look at your own circumstances to determine what your priorities are.
Q10: Is there any advice you can share for people who are struggling or worried they will struggle to meet their monthly payments due to the rise in increase?
A: Don’t bury your head in the sand. Speak to your mortgage lender without delay, as they should be able to help you devise a payment plan. Paying something is better than paying nothing at all.