If you’re looking to buy your first home right now, you’ve probably been hearing a lot about rising house prices and interest rates, as well as the cost of living.
With so much uncertainty, it’s really important to carefully consider how much you can afford to pay when buying a home, including your mortgage costs.
Since the start of the year, interest rate rises and record asking prices have been pushing up average mortgage payments.
The average first-time buyer monthly payment for someone taking out a 90% loan-to-value mortgage that is fixed for two years is now 20% (+£163) higher than at the start of the year. It now works out at £976 per month.
Property expert Tim Bannister says: “Those who want to move this year, particularly first-time buyers, may seek some financial certainty by locking in longer fixed-rate mortgage terms now before their monthly outgoings increase again.”
There a lots of different mortgages you can choose from. The interest rate you pay can be fixed or variable.
Think of a fixed-rate mortgage like a price freeze. Your interest rate will be guaranteed, so your monthly payments will remain the same for a specified period of time. And they don’t change until an agreed date. This can be anything from two to three years, up to 10 years, or even longer.
Fixed-rate mortgages are great for the certainty and peace of mind that comes with knowing exactly what you have to pay each month during the fixed period.
The gap between interest rates for shorter and longer term mortgages has been closing in recent years, and they’re now virtually the same.
For example, the average interest rate for a 75% loan-to-value mortgage is now 2.9% for either a two-year or a five-year fixed deal, according to data from the Bank of England. Historically, lenders offered a lower rate on a two-year fix, with a difference of as much as 1% between the two deals over the past five years.
So if you want to set your budget for a longer period, and you plan to stay in your home for more than a couple of years, you might consider locking in a longer-term fixed rate.
But remember, when the fixed period ends, it’s most likely that you’ll automatically be transferred onto the lender’s Standard Variable Rate (SVR). This is usually a higher rate of interest than the fixed one you were on. But, as your deal will have ended, you’ll be free to apply for a new mortgage. So it’s a good idea to plan ahead well before your fixed period ends.