The housing boom is causing mortgage prices to skyrocket as banks take advantage of surge in buyers

Mortgage rates have skyrocketed in the last few months, with the average home-owner paying up to £480 more interest on their fixed-rate deal every year. 

The cost of an average two-year fixed-rate mortgage – which had an interest rate of 2 per cent in June – now stands at 2.24 per cent.

Because of this increase, a homeowner who has a £132,128 mortgage – the UK average – will see an extra £330 on their bill every year.

A spike in interest as drastic as the one seen in September was last recorded in 2009. 

The interest figure for a five-year fixed-rate mortgage was 2.25 per cent in July. It now stands at 2.62 per cent – causing a yearly mortgage payment to increase by £480, Moneyfacts found.

UK mortgage rates have skyrocketed in the last few months, with the average home-owner paying up to £480 more interest on their fixed-rate deal every year. Pictured: Prime Minister Boris Johnson

Countless Britons have rushed to cash in on Rishi Sunak‘s stamp duty cuts announced in July – allowing buyers to avoid paying the tax on houses up to £500,000 – causing demands for loans to increase drastically.

Also contributing to the initial housing boom was the nation’s pent-up buyer demand post-lockdown – as well as a rush to get bigger houses outside of urban areas in the new work-from-home age.

In response, house prices have shot up too, now standing at 7.3 per cent higher than the year before, a report from Halifax revealed. 

The cost of an average UK home is  £249,870. This time last year it was £232,806.

But even with a rush to buy, coronavirus impacting people’s livelihoods has meant banks have had to waive overdraft fees and grant mortgage payment holidays – among a draft of other measures.

Analyst at Investec Ian Gordon told The Times: ‘To put it bluntly, banks have to claw back their revenues from somewhere. 

‘They have been so swamped with demand from home movers and first-time buyers that they have been able to price up across the board.’

The cost of an average two-year fixed-rate mortgage - which had an interest rate of 2 per cent in June - now stands at 2.24 per cent (file image)

The cost of an average two-year fixed-rate mortgage – which had an interest rate of 2 per cent in June – now stands at 2.24 per cent (file image)

It follows reports that more than half of mortgage customers who have tried to get in touch with their lender during the coronavirus pandemic have struggled to get through.

Some 56 per cent of borrowers who contacted or attempted to contact their lender reported having a problem, with issues including long phone queues and lenders failing to reply to messages left by phone or email, a survey by Which? found.

More than a fifth of those questioned said they had contacted or attempted to contact their lender since the start of the pandemic and six in 10 of those requested a payment holiday, a survey of more than 3,600 mortgage-holders found.

While some customers have struggled to get through to their provider, Which? said it has awarded some lenders ‘recommended provider’ status due to these companies scoring highly in both its customer satisfaction research and its analysis of the top mortgage deals.

It said that First Direct, Nationwide and Coventry Building Society have been rated the UK’s top mortgage lenders, according to its findings.

First Direct achieved excellent customer scores and was also rated highly for the transparency of its charges and keeping customers informed, Which? said.

Countless Britons have rushed to cash in on Rishi Sunak 's stamp duty cuts announced in July - allowing buyers to avoid paying the tax on houses up to £500,000 - causing demands for loans to increase drastically

Countless Britons have rushed to cash in on Rishi Sunak ‘s stamp duty cuts announced in July – allowing buyers to avoid paying the tax on houses up to £500,000 – causing demands for loans to increase drastically

Similarly, Nationwide and Coventry Building Society were also rated highly in the customer survey as well as the Which? analysis of lenders offering the cheapest deals.

Both were named Which? recommended providers.

At the other end of the spectrum, Chelsea Building Society was placed at the bottom of this year’s table, while specialist lender Kensington finished second from the bottom.

Which? money editor Jenny Ross said: ‘Choosing a mortgage is one of the biggest financial decisions people will ever make, and our analysis provides help for those who want to know which lenders combine the best service and cheapest rates.

‘Good customer service and communication have proven particularly vital since the start of the pandemic, so prospective buyers and re-mortgagers should factor them in as two of the most important aspects of choosing a mortgage, along with getting a good deal.’

The PM wants to turn ‘generation rent into generation buy’: Could new state-backed 95% mortgages get struggling homebuyers up the housing ladder? 

By Will Kirkman For Thisismoney.co.uk 

Prime Minister Boris Johnson this week promised to turn ‘generation rent into generation buy’ with plans to boost the availability of long-term mortgages for homebuyers with a small deposit.

In a speech to the virtual Conservative Party conference the PM said up to two million people who could afford repayments cannot currently get home loans. 

He said: ‘We need now to take forward one of the key proposals of our manifesto of 2019: giving young, first-time buyers the chance to take out a long-term, fixed-rate mortgage of up to 95 per cent of the value of the home – vastly reducing the size of the deposit. 

‘We will help turn generation rent into generation buy.’ 

The Prime Minister this week outlined plans to boost the availability of 95 per cent mortgages

 The Prime Minister this week outlined plans to boost the availability of 95 per cent mortgages

However, the Prime Minister failed to mention how this would actually be achieved.

To find out how it would actually work, This is Money contacted the Department of Housing but it simply said that more details would be sent out in due course. 

Large mortgages for borrowers with just a five per cent deposit have been available in recent years, but since the Covid crisis hit major lenders including HSBC and Santander have pulled all of these deals, save for a few specialist options.

And lenders are also being more stringent with who they will lend to on their 90 per cent loan-to-value deals. 

This, coupled with rising house prices, has left many first-time buyers with no way of financing their first home – leaving many to shelve their plans and continue to rent. 

First time buyers are now finding they will struggle to qualify for a loan without putting down a 15 per cent deposit.  

I’ve taken a mortgage holiday – could this help me? 

The Government is yet to make on an announcement on whether a state-backed loan scheme would be available at lower loan-to-value tiers.

This would potentially help existing homeowners who have had to take a mortgage holiday. 

While mortgage holidays don’t impact credit scores, industry insiders claim that some lenders are already starting to automatically decline applications from those who have taken one.

This means it may be difficult for some of these borrowers to secure finance in the future.

Easing the stress tests with a state-backed guarantee would presumably help to alleviate this.  

The Prime Minister gave little detail on how the plan would work in practice but he has asked Ministers to draw up plans which could see banks remove ‘stress tests’ brought in after the financial crisis of 2008/09.

This means applicants would have to jump through fewer financial hoops in order to secure a loan.

Currently borrowers have to undergo stringent affordability tests when applying for a mortgage – so that lenders are no longer hit with a string of bad debts when the economy goes sour. 

These include assessments of income, expenditure and existing debts, verification of income, an assessment of future income, and ‘stress tests’ to see if they could keep up with repayment if rates were to rise.

The criteria could potentially be relaxed under the Prime Minister’s new plans. 

Instead, the Government would extend a form of ‘state guarantee’ to lenders in order to absorb the risk.

It’s likely the Government is offering to underwrite this risk as a way to encourage more banks and building societies to start lending to small deposit borrowers again. 

In theory this would leave the taxpayer on the hook for potentially huge sums. 

Underwriting 10 per cent of a deposit on an average £220,000 first home for two million buyers could leave the government liable for £44billion

However, the likelihood of that liability crystalising is remote.

One mortgage expert, who backed the scheme, said the £44billion liability was likely to be a top-end estimate.

David McGrail, Compliance Director at UK-based mortgage broker and advice firm, First Mortgage, said the government could end up underwriting just five per cent of a deposit due to there still being good value in the 90 percent loan-to-value market – meaning a £22billion liability.

David McGrail, Compliance Director at UK-based mortgage broker and advice firm, First Mortgage, said the government could have a liability of between £22billion to £44billion - but said the move was low risk and positive for brokers and buyers

David McGrail, Compliance Director at UK-based mortgage broker and advice firm, First Mortgage, said the government could have a liability of between £22billion to £44billion – but said the move was low risk and positive for brokers and buyers

He said the government’s announcement could stimulate the return of 95 per cent loan-to-value mortgages and that the plan was a positive move for both brokers and buyers.

Mr McGrail told MailOnline: ‘The 95 per cent loan-to-value mortgages dropped away particularly because of concerns about the job market, unemployment and property values. 

‘But if the government steps in and offers that protection it will make a big difference.

‘It’s only a risk if the property market falls or property prices plummet. But considering the situation, these are good times and the market is going really well at the moment.

‘And this extra scheme should drive this on further. So this shouldn’t come with a huge risk.’  

Meanwhile, Iain McKenzie, CEO of The Guild of Property Professionals, believes the government could underpin as much as 20 per cent of a property.

He told MailOnline: ‘One could argue that it is a very good idea based on the fact that the UK is teetering on the brink a substantial recession, possibly as bad as the 1930’s, and any stimulus that promotes growth and income generation for the wider economy has to be positive.

‘The Government is underpinning house price growth and therefore effectively talking about a 15 per cent to 20 per cent equity of any property, the difference between 80 per cent LTV and 95 per cent LTV.

‘In 2010, the average house price was £170,000 whereas now in 2020 it is £237,000, and so from a long-term perspective any investment in property over the last 30 years or more has actually been a very good return on investment.

‘The Government under current projections is guaranteed to get any investment back when a property is resold.’

John Phillips, National Operations Manager at Just Mortgages added: ‘The government’s aspiration to get more people on the housing ladder is laudable and something that most people would be in favour of. 

‘However, guaranteeing such mortgages with tax payer money cannot be the way to go at a time when the national debt is growing by the day.’

He suggested the Government reintroduces a Mortgage Indemnity Guarantee (MIG) scheme which were widespread up until the year 2000. 

Phillips added: ‘Paid by the borrower the MIG protected the lender against loss in the event of the borrower stopping paying their mortgage. 

‘While some considered it unfair that the borrower paid the insurance premium it did ultimately benefit the borrower as it ensured a large number of high LTV mortgages.’ 

However, McKenzie urged the government to keep current rules over the vetting of mortgage candidates, saying it would increase the risk.

He said: ‘The only thing that would make it a poor decision would be if the Government removes all regulation and vetting of candidates to borrow the money in the first instance.

‘Because if they lend money to people that genuinely can’t afford it, it will just increase the number of repossessions and increase the problem in the housing market.’ 

The banking industry have also warned against irresponsible lending with Eric Leenders, managing director of personal finance at UK Finance, saying: ‘Firms have a duty to lend responsibly and consider the affordability of the mortgage in the long term, helping customers to avoid the risks associated with negative equity.’ 

No announcements have been made yet on who will be eligible for the scheme, whether it will be exclusively for first-time buyers, or whether anyone will be able to take advantage.

However, the relaxing of affordability rules could boost the chances of getting a mortgage for a worker who has been furloughed, or a self-employed worker whose business has been hit by lockdown. 

A current lack of low-deposit mortgages means it is difficult for first-time buyers to find a loan

 A current lack of low-deposit mortgages means it is difficult for first-time buyers to find a loan

In November last year the Conservatives promised to open a ‘new market’ in long-term, fixed-rate mortgages for first-time buyers, in particular for those with small deposits – similar to deals in America and Europe where 30-year mortgages are more normal.

The party suggested enlisting funding from institutional investors such as pension funds in order to do this.

First-time buyers are delaying their home moves due to lack of mortgages and high rates 

Nearly half of all potential first-time buyers have had to delay their plans by up to a year, research from challenger bank Aldermore found

This is Money recently revealed that a crunch at the lower end of the loan-to-value scalehas seen rates rise for those at the bottom end of the market.  

This is coupled with the financial hardships lockdown has already visited on many households across the country.

As a result one in two first-time buyers is now worried about their financial security and some 45 per cent say they need to raise a bigger deposit as providers will not lend as much as before lockdown. 

Many have also experienced failed attempts to buy a home due to the lockdown period, with one in six having a property sale fall through and one in five saying they pulled out of buying due to lockdown. 

However, experts within the mortgage sector cast doubts on how successful such a scheme would be, citing a potential lack of consumer appetite for locking into a deal for so long.

Chief among most borrowers’ concerns would be fixing at too high a level during the interest rate cycle, and whether these long term deals would carry expensive exit fees.

Though with the base rate currently sitting at a record low of 0.1 per cent it may be a tempting offer to some, and the number of borrowers taking five and 10 year fixed-rate deals is growing.

This, combined with the current low cost of borrowing for banks themselves, has pushed rates on longer term mortgages down to historically low levels. 

There is also concern that the new proposal could push house prices up.  

Though the Prime Minister’s announcement has won plaudits from some quarters, some in the mortgage industry have already voiced concerns over how it might be funded. 

Rob Houghton, chief executive of Reallymoving said: ‘We support the Government’s efforts to reduce barriers for first-time buyers and welcome the return of 95 per cent mortgages with caution.  

‘For those who have been saving a deposit for many years this will be welcome news, enabling them to make the first step onto the property ladder, but we would urge people to proceed with caution, consider the risks carefully and think long term about their property choices.

‘The Mortgage Market Review, which came into force after the credit crunch, remains in place to protect buyers from the kind of irresponsible lending practices we’ve seen in the past.’  

Costly: The average cost of a home in Britain has risen to £226,129, according to Nationwide

Costly: The average cost of a home in Britain has risen to £226,129, according to Nationwide 

Martijn van der Heijden of mortgage broker Habito said: ‘A minimum deposit of 20 per cent is now needed for most mortgages, which is extremely prohibitive for those looking to get on the ladder for the first time. 

‘Lenders need to be able to responsibly reintroduce products at higher loan-to-values to support first-time buyers and give them the best choices and outcomes.’

Craig McKinlay of specialist lender Kensington Mortgages said: ‘The ‘Generation Buy’ scheme will be, in effect, a replacement for Help to Buy. 

‘Only a few lenders are dipping in and out of the high loan-to-value market at present with ‘flash sales’ due to sheer demand – so this should reassure some lenders to enter more permanently and support first-time buyers.’

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