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High mortgage rates will leave first-time buyers struggling to get onto the housing ladder


3 min read

Mortgage rates are set to double to around 6 per cent. In the wake of the Chancellor’s mini-budget, the Bank of England is set to raise its base rate in November, and then again – to over 5 per cent – next February.

Over 2 million homeowners have fixed interest mortgage deals – many at less than 2 per cent - which come to an end over the next 15 months: these buyers face increased housing costs just when other bills are rising rapidly.

Kwasi Kwarteng’s fiscal event has sought to support home buyers by cutting stamp duty: the threshold doubles from £125,000 to £250,000 and for first-time buyers goes up from £300,000 to £425,000. But for most buyers the relatively small saving on the purchase costs will be more than offset by the higher cost of borrowing, and the majority of first-time buyers were already paying no stamp duty.

Acute shortages of homes on the market will keep prices artificially high

What are the likely consequences of these measures? Although it is rash to make any predictions in these turbulent times, I would hazard the housing market will take a dip but not catastrophically crash. Although fewer households will be able to buy, acute shortages of homes on the market will keep prices artificially high. The post-Covid boom may be over but this will not mean a calamitous bust.

More than half of all home owners have no mortgage; and many of the remainder have mortgage costs they can well afford. But higher interest rates will widen the gap between the older generation with lower debt charges and younger households who are already struggling.

There will not be a disastrous rise in re-possessions and homelessness because lenders have been much more cautious in their lending since the banking crisis; they have more funds in reserve and have improved their ways of helping stretched borrowers through hard times. But there will be some casualties as family budgets take a cumulative hit and the government’s Support for Mortgage Interest (SMI) – unhelpfully paid as an interest-bearing loan – now needs review.

Already, house prices and deposit requirements have meant home ownership rates are way below peak levels. It is not just higher costs of mortgages – and even more prudent lending by the banks and building societies – that will mean fewer first-time buyers getting onto the housing ladder: it is also the deep uncertainty about the future that will mean the next generation hold back.  

The Prime Minister may have abandoned the government’s previous target of 300,000 homes per annum, but the need for at least this number of new homes has not gone away. Unfortunately, interest rate rises, lower house prices, higher costs of labour and materials, and fewer first-time buyers, all mean the volume housebuilders are likely to ease up on their production of new homes.

The number of private landlords exiting the market has been growing following less favourable tax treatment and (necessary) new and forthcoming regulatory changes. Now those with buy-to-rent mortgages will face higher costs and may be unable or unwilling to pass these on to their tenants – who are already paying rents that absorb up to half their incomes. So, a greater exodus from the PRS can be predicted with consequences for those needing somewhere to live.

Housing associations are facing multiple challenges: higher development and maintenance costs while income from rents is to be capped; requirements to rectify the cladding and other defects of builders as well as measures to insulate homes and cut carbon emissions. They depend on borrowing to create the affordable homes the country desperately needs and higher interest rates only adds to their problems.


Lord Best, crossbench peer.

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Read the most recent article written by Lord Best - More funding for supported housing is a no brainer


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