How will the Bank of England interest rate hike impact first time buyers?

According to experts, the newest interest rate increase is bad news for first time buyer mortgages

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The Bank of England has confirmed an interest rate hike of 0.5% to 3.5% in a bid to tackle inflation, which is currently at 10.7%. 

Buying a house is already a challenge for most, especially those who are first starting out on the property ladder. The Bank of England interest rate hikes will have a detrimental effect on those without the security of a fixed rate deal and they will see their mortgage repayments increase. 

After the fallout from the mini-budget in October, many first-time buyers postponed their plans and found it much harder to secure a mortgage. 

Simon Gammon, managing partner at Knight Frank Finance says, ‘Fixed rate remortgages remain elevated following the mini-budget, so today's hike to 3.5% was largely baked in. November and December have been particularly quiet in the property market and it's clear that many borrowers opted to postpone plans in the wake of the mini-budget while conditions settled.’

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How will the Bank of England interest rate hike affect different generations? 

In their mortgage statistics report Uswitch compared the amount different generations were paying for their mortgages and who would face the biggest financial consequences. 

They found that 18-24 year-olds paid the highest amount in monthly mortgage repayments at an average of £1,390.90. This is a staggering 59% more than the second most expensive age group 25-35 year-olds, who had average monthly repayments of £874.35. Those who were 55 and older had the cheapest monthly repayments at just £763.79. 

This generational gap was also evident in the length of the mortgage terms of buyers. Those aged 25-34 had the longest mortgage terms at 29.44 years and 57.25% of this age group has a mortgage term of 30 years or longer. The length of mortgage terms decreased with age, with those aged 55 and over having an average of 22.73 years. 

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However, Tim Bannister, property expert at Rightmove, believes The Bank of England interest rate hike will not have a significant impact on home movers' behaviour.

‘It’s important to remember that this rise was largely expected by the markets and so will already have been factored into many mortgage lenders’ fixed rates. So the good news is we don’t expect this rise in the base rate to translate directly into increases in current fixed mortgage interest rates.  

‘In late September we saw a rapid increase in mortgage interest rates beyond the base rate trajectory, so the indications are that the direction of travel of fixed-rate mortgage deals will be downward next year. The rise in the base rate will affect those on a tracker mortgage, though average tracker rates are currently lower than fixed-rate deals.

‘Many people will be using this time between Christmas and New Year to assess their options, consider what they can afford, and make a move next year, and they will be spurred on should fixed-rate mortgages drop as anticipated.’

Tom Bill, head of UK residential research at Knight Frank says to not expect the fall in house prices to stop anytime soon, which makes finding the best mortgage rates even more crucial. ‘Higher borrowing costs will keep transaction volumes in check and mean that price declines become more widespread. We expect prices to fall by 10% over the next two years, not because of the mini-Budget but because the era of cheap debt will have come to an end.’

Rebecca Knight
Deputy Editor, Digital

Rebecca Knight has been the Deputy Editor on the Ideal Home Website since 2022. She graduated with a Masters degree in magazine journalism from City, University of London in 2018, before starting her journalism career as a staff writer on women's weekly magazines. She fell into the world of homes and interiors after joining the Ideal Home website team in 2019 as a Digital Writer. In 2020 she moved into position of Homes News Editor working across Homes & Gardens, LivingEtc, Real Homes, Gardeningetc and Ideal Home covering everything from the latest viral cleaning hack to the next big interior trend.