Buying your first home is never easy, but over the past couple of years, those hoping to get a foot on the housing ladder have had a particularly tough time.
During the early days of the pandemic, banks snapped “risky” low-deposit mortgages from the market, before reviving them months later at higher interest rates.
As things got back to normal, home prices jumped into the stratosphere. Heights of £26,000 per annum are fantastic for many existing homeowners, but first time buyers savings pots are struggling to keep up.
And now, paying off a mortgage is set to become more expensive for many as interest rates rise thanks to rising inflation.
Tough: Those looking to buy their first home have faced setbacks in the past two years
So I was surprised to see one of the major mortgage lenders send out a press release today telling first time buyers to “buy now” (its capitals, not mine).
A PR agency working for Metro Bank sent out the email, including the following line: “Head of Mortgage at Metro Bank, Tony Davis has issued advice to first-time buyers, with an important message to act now, before making further changes.”
“Our advice to all buyers is that now is the time to act before interest rates rise again,” she added.
To say this bothered me is an understatement. It’s nowhere near as simple, and those who shoot in Metro Bank know it.
I know most personal financial journalists would have the common sense to send email straight to the junk mail, but sending such a fear-inflicted message is stunningly irresponsible.
I sincerely hope it is not the same advice given to inexperienced novice buyers who head to a Metro Bank branch to discuss a mortgage.
It’s important to say that I don’t want anyone to be put off buying their first home — as long as they’re in the financial position to do so and aware of any potential risks.
But I’m uncomfortable about a bank pressuring them into making decisions that may not be right for them, in an effort to boost its profits.
Think carefully: buyers should not be pressured into making important decisions by banks, who have a vested interest in getting them up the ladder as quickly as possible.
It is true that average mortgage interest rates are already increasing, and they could continue to do so.
However, 5- and 10-percent mortgages, the type favored by first-time buyers, are seeing their lowest rises ever.
A recent report by financial information service Moneyfacts said: ‘It is interesting to note that only the 90 per cent and 95 per cent loan-to-value level (often preferred by first-time buyers) as the average of two and five are still the fixed rates for the year. The current rate is lower than it was at this time last year, which may give hope to those looking to make a step up the real estate ladder.
You can find out typical rates for the mortgage you need here.
Older homeowners with more equity have seen rises much faster and have the most to worry about when it comes to rising prices.
And the same rising average mortgage rates that Metro Bank uses to try to speed up first-time buyers could be responsible for lower home prices in the months or years ahead.
This week, analysts at Capital Economics said house prices could drop as much as 10 percent “soon” as rising interest rates cause real estate markets around the world to crash.
This is the most extreme forecast I’ve seen, and other experts predict more moderate declines or small increases.
But falling home prices are a particular risk for first-time buyers because they typically only put down a small deposit, which means they could be in negative equity if values drop.
As home prices become more closely aligned with wages (more on that later), banks have made it easier for first-time buyers to get mortgages with smaller down payments.
Negative equity is a particular risk for buyers of newly built homes – a requirement of the still hugely popular Help to Buy programme.
These can lose some of their value in the first few years because they are less attractive to later buyers when they are no longer brand new.
What should first time buyers do?
What should a first time buyer do? I’m in my early 30s which is something my friends ask me about all the time.
With house prices skyrocketing, those close to saving enough to put down have asked me if it was a good time to buy their first home, or if they should hold off in the hope that prices start to fall and they can afford something better.
I told them I do not know. First of all, I don’t have a crystal ball and anyone who tells you they know exactly when and how home prices will go up or down is a liar.
And secondly, encouraging a friend to buy a house for which he lost money would lead to some pretty awkward trips to the pub indeed.
I don’t have a crystal ball and anyone who tells you they know exactly when and how home prices will go up or down is a liar
But with the pressure to say something useful, usually after a couple of drinks, I would say they should ask themselves two things.
First, is this the right move for them at this point in their lives? Once you own a home, things like deciding on a major career change or moving to another city suddenly come with a lot of strings attached to it.
If your home depreciates in value, it becomes difficult to remortgage or sell and you’ll find yourself stuck with it—and possibly paying a higher mortgage rate—until it’s over your mortgage amount again.
This becomes a bigger problem if you want to start a family and live in a one-bedroom apartment, for example.
But on the other hand, buying a home gives you security, an asset that we hope will moderately increase in value over the long term – even if it fluctuates in the next couple of years – giving you some money to roll over until your next property.
Pros and cons: Buying a home gives you security, an asset that we hope will moderately increase in value over the long term – but there are also risks
Barring the most extreme scenarios, you will still enjoy these benefits regardless of whether the line on the UK house price chart goes up or down on a monthly basis.
The second thing they need to ask themselves is if they can afford it – and that doesn’t just mean having a large enough deposit.
When I write about mortgage rates going up to 3 or 4 percent, a lot of our readers often point out that they paid 15 percent interest on their first home in the 1980s.
It’s true, but the cost of a home relative to median income has been rising steadily in recent years.
Metro Bank replied
I asked Metro Bank to respond to my concerns regarding the press release.
A spokesperson for the company said: ‘We agree that first-time buyers should take the time to consider their decision carefully. Our advice is aimed at those who are specifically ready to call home home, emphasizing the importance of taking advice, research and due diligence before making a decision.
For consumers who are ready to move on, we say now is a good time to do so, rather than delay, given that rates have risen significantly over the past six months and are expected to increase further as the cost of mortgages rises as a result.”
It recently reached 7.1, which is the lowest it has ever been recorded. Since the start of the pandemic, property prices have increased by 16.8 percent while average incomes have increased by just 2.7 percent, according to Halifax.
So while the interest component is several times lower than it was decades ago, first-time buyers are taking on much more debt, and mortgage payments will take a larger portion of their income.
All the more reason not to rush into anything.
I can’t tell you if this is a good time to buy a home, either, and Head of Mortgages at Metro Bank – although one of us has a huge interest in doing so.
It’s your life. Do your research, but don’t rush into panic buying because of interest rates.
Be aware of home prices going up and down in the short term, but as long as you’re buying a home that you trust someone will eventually want to buy from you, don’t let them dominate your decision-making.
And remember, you first and foremost buy a home as a place to live and enjoy — not as an investment.
Best mortgage rates and how to find them
Mortgage rates skyrocketed as the Bank of England’s base rate rose rapidly.
If you are looking to buy your first home, move or remortgage, or are a buy-to-let owner, it is important to get good mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with an independent, no-fee L&C broker.
The Mortgage Calculator backed by L&C allows you to filter deals to see which ones fit your home value and deposit level.
You can also compare different durations of mortgage rates, from two-year fixes, to five-year fixes and ten-year fixes, displaying monthly and total costs.
Use the tool at the link below to compare the best deals, factoring in fees and prices. You can also start an online application on your own time and save it as you move forward.
> Compare the best mortgage deals available now
Some of the links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to influence our editorial independence.