Higher mortgage rates are adding to long-standing affordability issues in the housing market.


First-time buyers are increasingly turning to "the bank of mum and dad" to secure a mortgage as a generation that has until recently only ever known rock-bottom interest rates attempts to secure a footing on the property ladder.

While surging house prices have for many years been a barrier to first-time buyers, 14 consecutive interest rate increases by the Bank of England has on top of that heaped hundreds of extra pounds onto the monthly cost of financing a mortgage. Dominic Taddei, chief executive of the Mortgage Advice Bureau network in Scotland, said this has intensified the affordability challenge in places like Edinburgh where a typical two-bedroom flat costs in the region of £300,000, requiring at £30,000 deposit which is "no mean feat".

“What we are seeing now is a huge move towards the bank of mum and dad," he said. "Somewhere in the region of 40% of our purchase applications now, part of that deposit is made up of a gifted deposit which has to be declared to the lender, which is why we have that information, and that’s a massive change on years gone by.

The Herald:

"Almost half of applications now we are seeing include some form of gifted deposit, usually mum and dad or a family member. It [was previously] 10% to 15%, somewhere in that region."

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The UK base rate which is set by the Bank of England (BoE) and dictates the cost of borrowing money fell to a record low of 0.1% in March 2020 as policymakers braced for the onset of the Covid pandemic, but even prior to that it had long been running at far below the historical average. Until the latest series of increases, the base rate had not breached the 1% barrier for more than 13 years.

In that time a new generation has matured into adulthood having never experienced the level of borrowing costs that come with a higher base rate that currently stands at 5.25%.

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“I am certainly old enough to remember the times when interest rates were at the sort of levels they are at just now, but interestingly it has been low for quite a long time, so I have got a 24-year-old, 21-year-old and a 20-year-old and those three and probably a huge section of first-time buyers actually don’t know any different," Mr Taddei said.

“It’s quite an extreme set of circumstances that those buyers now find themselves in. However, society and consumers tend to recover and react pretty quick to what is happening.”

Existing homeowners coming off fixed-rate deals have also come under pressure as they renegotiate at much higher rates.

According to recent figures from UK Finance, there has been a rise in the number of households in mortgage arrears. The trade body's figures show there were 81,900 homeowner mortgages in arrears of 2.5% or more of the outstanding balance in the second quarter of this year across the UK, a 7% increase compared to the previous quarter.

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Among that total, 30,940 fell within the lightest arrears band ranging from 2.5% to 5% of the borrower's outstanding mortgage balance, up 12% on the previous quarter and 23% year-on-year. Some 14,070 homeowners had arrears of between 5% and 7.5% of the outstanding balance, a further 8,200 were between 7.5% and 10%, and 28,690 were at more than 10%.

Mr Taddei said despite these and further figures from the Office for National Statistics which suggest that as many as a third of all mortgage holders are struggling to make their monthly payments, many clients of the Mortgage Advice Bureau find they are still affordable with "a little bit of compromise here and there".

“People are cutting back on luxuries," he observed.

"They are not eating out as much, they are deciding to stay in and cook and watch Netflix, and they are not holidaying as much. That is certainly what we are hearing from our clients when we speak to them, and I think that is also possibly an on-going fallout from Covid.”