What you need to know as a first-time buyer

The uncertainty surrounding the UK housing and mortgage market has spread among first-time buyers.

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

His controversial plan foresees extensive tax breaks and more relaxed rules and regulations for businesses. As the UK’s cost of living crisis continues, Kwarteng claims his budget will boost growth. Critics say so it will mostly help the rich and make Britain more unequal.

The mini-budget had one positive thing for those trying to buy a home: stamp duty, a tax many buyers have to pay when buying property, was reduced.

Stamp duty reductions

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 UK property price before the mini-budget came into force. The changes therefore do not affect many first-time buyers.

While the cuts will benefit some buyers, any gains could be wiped out by other rising costs, explains Paresh Raja, managing director of financial services firm Market Financial Solutions.

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

Francis Gill, a financial adviser at London-based firm Humboldt Financial, takes a similar view.

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

So what about mortgage interest?

The housing and mortgage credit sectors in particular have been hit, with lenders are pulling hundreds of mortgages or pricing them at a much higher level after government bond yields and Bank of England interest rate expectations both rose sharply. This pushed up costs for borrowers, as the BOE’s base rate helps price all types of loans and mortgages in the UK.

According to Moneyfacts data, the average interest rate on a 2-year fixed mortgage exceeded 6% this week – up from 2.25% just a year ago. This can go even further, says Nicholas Mendes, a technical mortgage manager at mortgage broker and adviser John Charcol.

“With rising lending costs, an unstable economic outlook and factoring in service levels and future rate increases, we could see an average rate of 7% in the new year,” he said.

Many borrowers and would-be borrowers are already worried they won’t 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, explains Gill.

“Make sure your credit score is accurately reflected, make sure they speak to an independent broker, consider setting a term {…]and consider any early repayment fees,” he suggests.

“Talking to someone who can analyze their situation expertly is key. Really consider if the rates are that high in 2/3 years (however long they’re considering fixing) if the mortgage is affordable,” he adds.

The market points to a difficult 12 months

Nicholas Mendes

Technical mortgage credit officer at John Charcol

What’s next for the housing market?

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

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

“Property prices are expected to decline in 2023, just as we expect prices to decline slightly from their current highs,” explains Mendes.

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

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

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

“There may be an opportunity if many buy2let landlords leave the market because there is an influx of properties for sale and prices fall, they may actually now get on the ladder,” he believes.

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