Aspiring first-time buyers might have thought they already faced a tall order getting on the property ladder.
Two years of double digit house price rises and 40-year high inflation will have left many thinking things couldn’t get much worse.
But on top of that, first-time buyers are now facing some of the highest mortgage rates recorded since the financial crisis, combined with an expectation that house prices will fall in the near future.
Are property prices about to crash? High mortgage rates are leading some to believe that prices will now begin to fall.
The average two-year fix peaked at 6.65 per cent on 20 October, according to Moneyfacts. While that has decreased in the last couple of weeks and is now sitting at 6.28 per cent, it is still much higher than the typical rate before the ill-fated mini-Budget on 23 September which was 4.74 per cent.
This time last year, the average deal charged 2.29 per cent, meaning homebuyers will be paying hundreds of pounds more each month compared to those who bought last year.
On top of much higher mortgage costs, first-time buyers will be fearing the country may be on the cusp of a housing crash, heightening the risk of falling into negative equity for those buying with small deposits.
In fact, house prices dropped 0.4 per cent in October, the third drop in the last four months, according to Halifax’s latest house price index.
Market commentators are warning of price falls and most estate agents are now expecting prices to drop over the coming year, according to Rics’ latest residential market report.
Some aspiring first-time buyers will be putting their plans on hold until mortgage rates come down, or at least until the outlook for house prices improves.
But sticking it out and buying a home now could have its advantages, provided they can still afford the higher mortgage rates.
– You can check the latest mortgage rates for your deposit size using our tool
The current market conditions could result in fewer buyers competing with one another, allowing more room for negotiation with sellers.
Stick or twist? Many first-time buyers are deciding to put their plans on hold, but for those who can afford it, sticking it out and buying a home now could have some advantages
Jeremy Leaf, north London estate agent and a former Rics residential chairman, says: ‘It might be a good time to buy your first home because some prices are softening.
‘We are finding that sellers are generally more receptive and open to negotiation than they have been for several months.
‘But of course it may be that lending criteria gets stricter and job prospects worsen which might otherwise persuade a first-time buyer to hold back until the market appears more settled.’
According to Rob Bence, co-founder of the property forum, Property Hub, what was a sellers’ market has quickly transformed into a buyers’ market.
It is a marked change compared to the property market of the past two years, when prices soared and competition became red hot after the country emerged from the first Covid lockdowns.
Bence says: ‘Try and remember just how bonkers the first half of this year was. People were blind-bidding on homes, they were pleading and persuading estate agents in any way they could, just to secure a viewing.
‘And properties were selling far above asking price – these things were the norm, not the exception.
‘Now, thanks to the common consensus that property prices may fall and changes in the market causing apprehension, it’s going to make it so much easier for first-time buyers to actually transact.’
Why might now be a good time to buy a first home?
It’s important to remember that sellers, as well as buyers, are deciding now is not the right time to transact. Sellers have also been exiting the market, according to RICS.
However, whilst this may help to counteract any supply and demand imbalance between buyers and sellers, it also means those that are listing their homes for sale now are likely to be doing so because they absolutely have to.
Take the plunge? Having often spent years saving up for a deposit, first-time buyers now face the prospect of much higher mortgage costs and house price falls
‘There are many potential sellers who are choosing not to list their properties while they wait it out and see what’ll happen in the market,’ adds Bence.
‘This means that those who are listing are likely to be highly motivated sellers, which means putting in offers below the asking price is expected.
‘I think first-time buyers should be bold with their offers – the lack of competition really strengthens their hand right now. However, in areas of high demand, they may not get that cheeky discount they’re after.’
How can first-time buyers spot a good deal?
It can be tricky to work out when it is appropriate to offer less than the asking price, especially for first-time buyers who are new to negotiating.
One situation where such an offer has a good chance of being accepted is when there are a number of homes in the area which are struggling to sell.
In this scenario, the buyer can feel more confident in offering significantly under the asking price without offending the seller.
It means it is worth first-time buyers doing their research, and spending some time on property portals such as Rightmove and Zoopla to understand the typical prices of homes in each particular area and whether sellers are reducing them after failing to sell.
Leaf says: ‘If you are ready to make an offer, first check how prices have changed for the sort of property you are interested in, in your area of choice.
‘See how much is available and check how long similar properties have taken to sell.
‘Sometimes you can get a discount but it depends on the original asking price. If a property is already competitively priced, then you may struggle to persuade the seller to drop the price.’
Keep an eye on the market: Prices may come down in the area you are looking and if certain properties remain on the market, the seller may become more open to lower offers
A lot will also depend on how long a property has been on the market. The longer it has sat festering, the easier it will be to do a deal.
‘A seller who has been on the market for a while may be more open to persuasion when it comes to the price than one who has just come on the market,’ says Leaf.
‘The properties which are likely to come with discounts are those which have been on the market for a while.
‘Also, those which have less demand for them. In our area, we have found that flats without outside space seem to take longer to shift, so you might be able to get a deal on something like that.’
Should buyers be afraid of falling house prices?
Nobody wants to buy a property just before house prices fall, particularly at a time when mortgage rates are so high.
Savills has forecast a 10 per cent fall in house prices next year, a significant downgrade from the one per cent drop the estate agency predicted in May.
Meanwhile analysts at Capital Economics are predicting a 12 per cent fall by mid-2024, and Credit Suisse expects prices to drop by as much as 15 per cent.
Even the more bullish estate agents are talking about a correction, which is their way of saying prices will fall.
Some experts within the industry are therefore advising caution rather than immediate action.
Fall: The average UK house price is now £292,598, down from £293,664 last month
Henry Pryor, a professional buying agent says: ‘Kids, don’t buy a house before Christmas.
‘Every index is now red with house prices slipping month on month and expected to slide further into the new year.
‘Everyone would love to own their own home but the forecast is pretty bleak. If house prices were to fall by 10 per cent next year – and some people are predicting sharper falls – then those who bought with a 10 per cent deposit would have lost it all.
‘It’s hard advice to give and harder to heed, but my advice to my kids right now is to wait.’
However, others argue that those who are buying a home to live in for five years or more could potentially ride out the price fluctuations.
Jeremy Leaf says: ‘Although many recent surveys have suggested prices will fall, none seem to be saying they will drop dramatically but more likely gradually over the next one to two years.
‘On the other hand, most say values will pick up again in two to three years’ time, so if your financial prospects are reasonable and you would rather pay your mortgage than the landlord’s, now may be a good time to take the plunge and buy your first home.’
Tipping point: Major housebuilders are reporting falling demand for new homes
Rob Bence adds: ‘If buyers are buying for the medium to long-term, as long as they’re comfortable with the financial commitment, now – in my opinion – is no better or worse time than any.
‘A property purchase is one of the biggest financial decisions you’ll make, and if anything, the cooler conditions now are far more favourable than they were six months ago.’
Should first-time buyers be afraid of negative equity?
A major fear for those buying with smaller deposits is the potential of falling into negative equity were house prices to suddenly fall. This is where the property becomes worth less than the mortgage secured on it.
If this happens they may find they are unable to move home. If they needed to remortgage, they may not be eligible for a fixed rate and find themselves stuck on their lender’s standard variable rate, which is typically higher.
Buying agent, Henry Pryor says: ‘Those looking to buy will of course have modest deposits which are the first things to be eaten away as prices fall.
‘Your mortgage lender doesn’t share your loss and unlike in America you can’t just hand back the keys when your equity has been wiped out – you slip into something called “negative equity”‘.
‘This is a horror. It’s like watching your home burn. You are powerless to stop it and it lives with you for years to come.’
Those wanting to buy over the coming months will therefore need to be wary of overstretching themselves.
Having a large deposit will not only give first-time buyers access to potentially better rates, it will also protect them from falling into negative equity by providing a buffer.
‘The bigger the deposit you can put down, the better,’ says Mark Harris, chief executive of mortgage broker SPF Private Clients. ‘If you are a first-time buyer, pulling together the deposit can be tricky which is why many turn to the Bank of Mum and Dad for help.
‘If parents can assist with a gifted deposit, this could be a big help – albeit the money loaned will be factored into affordability calculations by lenders, reducing the size of mortgage you can take out.’
Consider buying with someone else
Whilst saving enough for a deposit is one hurdle to leap, there are plenty of aspiring first-time buyers who may now feel they are unable to afford the mortgage amount required.
One of the major differences when it comes to affordability is whether someone is buying alone or with someone else.
Saving the deposit and affording the higher mortgage repayments will be much easier to stomach as two people sharing the burden.
Harris adds: ‘Buying with friends or siblings will increase the size of mortgage you can take on as more than one income is taken into account when deciding how much you can borrow and more people will be contributing to the deposit, enabling you to access cheaper mortgage rates.
‘Joint borrower, sole proprietor mortgages are also increasingly popular, enabling parents to buy with their child, boosting income and the deposit while the parents’ names don’t go on the property deeds so there is no additional stamp duty to pay.
‘Whatever you decide to do, advice is so important so speak to a whole-of-market broker about the options available to you.’
When will mortgage rates go down?
The typical cost of a mortgage has been pushed up over the past year following successive base rate rises by the Bank of England.
The average two-year fixed rate mortgage is now 6.41 per cent, according to Moneyfacts. This time last year the average deal charged 2.29 per cent.
On a £200,000 mortgage being repaid over 25 years, that’s the difference between paying £1,339 a month and £876 a month.
Many will fear mortgage rates might get even worse considering the base rate is expected to continue rising over coming months as the Bank of England battles to bring inflation to heel.
However, there are already signs that the tide may be turning for mortgage rates. That is because, for the past few weeks, the base rate rise has not been the only factor affecting them.
The average two-year fixed mortgage rate is now 6.41 per cent with a five-year fix at 6.2 per cent, according to Moneyfacts.
On 23 November, former prime minister Liz Truss’ Government, led by then-chancellor Kwasi Kwarteng, announced a series of unfunded tax cuts in a mini-Budget that rocked the financial markets.
After that, the typical two-year fixed rate mortgage increased from 4.74 per cent to a peak of 6.65 per cent on 20 October, before reducing to 6.28 per cent as of 14 November.
The five-year fix, which peaked at 6.51 per cent, now sits at 6.07 per cent.
Lenders including Platform, Yorkshire Building Society, HSBC, Halifax, Lloyds and NatWest have all reduced their fixed rates in the last week.
Furthermore, swap rates have been falling in recent weeks. Swap rates are an agreement in which two counterparties, such as banks, agree to exchange one stream of future interest payments for another, based on a set amount.
Put more simply – swap rates show what financial institutions think the future holds concerning interest rates. Lenders are essentially hedging their bets against what could happen to interest rates over various periods.
As swaps fall, mortgage rates typically fall. Conversely, if they rise, mortgage rates tend to follow suit.
Mark Harris says: ‘Fixed-rate mortgages shot up in pricing after the mini-Budget and thankfully are starting to come down a little but they are still comparatively more expensive than tracker or variable rates.
‘The problem first-time buyers have is that they are usually on a tight budget so don’t have cash to spare to cope with fluctuating mortgage payments, which is why a fixed-rate mortgage tends to be the sensible option.
‘However, because pricing on these is relatively high at the moment, and expected to come down further, we are seeing a number of clients opt for variable or tracker rates with no early repayment charges; the plan is that these borrowers will move onto a fixed rate once pricing on these falls.
‘This could be an option for you but it is important to seek advice from a broker as to the best option for your circumstances.’