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KickThemInThePant

Ftbs Can Now Afford To Borrow £2,500 Less - Effect?

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The media have downplayed the impact of rate rises, by stating that a rise of 0.25 will add about £16 to the monthly mortgage repayments of a £100,000 loan.

Lets assume a ftb could have afforded a £100,000 mortgage based on monthly repayments of £576, given a mortgage rate of 4.75% (i.e. 0.25% above base rate).

Now given a 0.25% rise in their mortgage rate (to 5% again 0.25% above base), the same ftb can now only afford to borrow £97,500 based on equivalent monthly repayments.

Similarly with another 0.25% hike in the near future the same ftb could only afford a mortgage of £95,100 given the same monthly repayments.

It is this figure which is critical not the amount extra a person will have to fork out each month. Money is finite, it doesn't grow on trees!

In short, with just 2 interest rate hikes the average ftb will be able to offer about £5000 less for their first home based on their monthly salary.

Surely it is the amount that ftbs can afford to fork out of their wallet each month that counts, which if anything has fallen recently (given the price of petrol etc.) and not the amount that banks are prepared to lend.

When buying a house the first question is "how much can I lend?", the second and more important is "how much can I afford each month?" It is the second which determines house prices not the first.

Of course the same also applies for people wishing to trade up.

Comments welcome

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In my experience (friends who have bought recently) they tend to ask the first question - how much can I lend and rarely think about - how much can i afford.

What also concerns me are the 10year fixed rate mortgages offered by some lenders - interest rates are not going to affect them for 10years! How many first time buyers have taken out these mortgages? They may have paid an extortionate price for the house but have factored in they can pay the fixed rate for 10 years and any rises in rates will not affect them.

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In my experience (friends who have bought recently) they tend to ask the first question - how much can I lend and rarely think about - how much can i afford.

What also concerns me are the 10year fixed rate mortgages offered by some lenders - interest rates are not going to affect them for 10years! How many first time buyers have taken out these mortgages? They may have paid an extortionate price for the house but have factored in they can pay the fixed rate for 10 years and any rises in rates will not affect them.

Variable rate, fixed rate the issue is the same. Sure people who took out a fixed rate mortgage a month ago will not be affected in the near term, but what about people considering a new fixed rate mortgage now? Repayments will be more now than they would have been if they took out the same mortgage a month ago, meaning that a ftb or anyone else can now afford to borrow less!

There are really 2 issues here:

1) the effect on house prices, if people can now afford less then they will have to offer less.

2) protection against negative equity. A fixe rate would be sensible but on average people move house after 4 years, so where does this leave somene who bought a house for £100,000 which could be worth £75,000 in 4 years. Negative equity prevents people from trading up as there is no capital left just debt. Personally I can't think of a worse investment at the moment, except perhaps a timeshare in Lebannon.

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Sure people who took out a fixed rate mortgage a month ago will not be affected in the near term...

Abbey raísed their fixed rates in May/Jun (and the SVR spread as well after the fixed period ends - sneaky :blink: )..

It seems as if this is pretty standard practice as the cost of mid/long term funding rises in line with projected future IRs

Edited by Wuluf

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Variable rate, fixed rate the issue is the same. Sure people who took out a fixed rate mortgage a month ago will not be affected in the near term, but what about people considering a new fixed rate mortgage now? Repayments will be more now than they would have been if they took out the same mortgage a month ago, meaning that a ftb or anyone else can now afford to borrow less!

There are really 2 issues here:

1) the effect on house prices, if people can now afford less then they will have to offer less.

2) protection against negative equity. A fixe rate would be sensible but on average people move house after 4 years, so where does this leave somene who bought a house for £100,000 which could be worth £75,000 in 4 years. Negative equity prevents people from trading up as there is no capital left just debt. Personally I can't think of a worse investment at the moment, except perhaps a timeshare in Lebannon.

I think all of this is absolutely right. If I had just brought a house, I would draw little comfort from the fact that my repayments were on a fixed rate. Sure this would mean that I could afford my repayments going forward, but it will do nothing to protect me from house price falls. Also, the fixed rate will end in time. My understanding (and this is purely anecdotal) is that the take up of long term fixed rate mortgages in the UK has been very low - unlike in other countries where they are the norm eg the US, which is surely one reason why interest rate increases there have failed so far to cause large house price fall. I think most people go for a 2-5 year fix, becasue they are worried that fixing for longer could be bad value if rates go down. If interest rates continue their upwards trend (is anyone out there really going to argue that we are not entering the upwards part of the cycle?), then when the fixed rate ends the poor FTB faces a double whammy of higher gerenal interest rate plus possible negative equity (which could all add up to a very expensive sub-prime mortgage). Maybe this scenario won't come to bear, but there's got to be at least a good chance that it will. This should be scary to FTB...but are they even running this type of analysis?

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What also concerns me are the 10year fixed rate mortgages offered by some lenders - interest rates are not going to affect them for 10years! How many first time buyers have taken out these mortgages? They may have paid an extortionate price for the house but have factored in they can pay the fixed rate for 10 years and any rises in rates will not affect them.

Concerns you? Because they won't lose their houses if interest rates rocket? Selfish, non? :blink:

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The media have downplayed the impact of rate rises, by stating that a rise of 0.25 will add about £16 to the monthly mortgage repayments of a £100,000 loan.

Lets assume a ftb could have afforded a £100,000 mortgage based on monthly repayments of £576, given a mortgage rate of 4.75% (i.e. 0.25% above base rate).

Now given a 0.25% rise in their mortgage rate (to 5% again 0.25% above base), the same ftb can now only afford to borrow £97,500 based on equivalent monthly repayments.

Similarly with another 0.25% hike in the near future the same ftb could only afford a mortgage of £95,100 given the same monthly repayments.

It is this figure which is critical not the amount extra a person will have to fork out each month. Money is finite, it doesn't grow on trees!

In short, with just 2 interest rate hikes the average ftb will be able to offer about £5000 less for their first home based on their monthly salary.

Surely it is the amount that ftbs can afford to fork out of their wallet each month that counts, which if anything has fallen recently (given the price of petrol etc.) and not the amount that banks are prepared to lend.

When buying a house the first question is "how much can I lend?", the second and more important is "how much can I afford each month?" It is the second which determines house prices not the first.

Of course the same also applies for people wishing to trade up.

Comments welcome

100% correct.

Affordability has been the mantra. Affordability for buyers (irrespective of which group) has just got worse.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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