Despite the price declines month after month, the housing market has so far avoided the most pessimistic predictions of a market crash.
Mortgage repossessions have reached historically low levels, lenders have stepped in with a range of measures to ease the pain of high rates, and so far the decline in rates has been gradual.
But the modest price drop hides a ripple beneath the surface. Homeowners are nearing the end of fixed-price deals Increasingly they are choosing to sell long before they are forced to, and they are seeing the writing on the wall of high mortgage rates.
First-time buyers who purchased using the Help to Buy Stock Program At the sharp end.
“Help to Buy has encouraged people to buy properties that they actually couldn’t afford. A lot of those people are now looking to refinance and they’re completely failing their affordability tests,” says Ranald Mitchell, of Charwin Private Clients.
“Since the purchase, they have added 2 cars, 2 children, loans and credit cards to their lives, moreover, I started helping to buy interest payments.”
Under the scheme, which closed in March, buyers could buy a new home with a 5% deposit and a government-backed equity loan of 20%, or 40% for those buying in London. This loan was interest free for the first five years. After that, the interest is calculated at 1.75% – a rate that then increases by an inflation-related measure.
The rate of interest is much lower than today’s mortgage rates. But the payments have a cumulative effect. They are hitting first time homeowners Just as their fixed rate deals expire and their mortgage payments increase.
Increased costs are starting to cause first-time homeowners to downsize, a situation most would never have anticipated when taking their first step on the real estate ladder.
“We see people who can’t be helped and really think, let’s start over and buy something we can afford,” says Mitchell.
Daryl Zover of The Mortgage Expert Group knows a young couple with two children who sell up and move back in with family after costs skyrocket.
The young family bought a three-bedroom house in the south-east for £300,000 with a 20% equity loan from Help to Buy, and took out a mortgage five years ago at about 2%.
but, Their mortgage rate is set to jump to 5% after the five-year fix expired two months ago. The monthly payments were to increase from £712 to £1085. On top of that, they had to start paying nearly £100 a month in interest on their equity loan.
“It just wasn’t possible for them,” Zafar says.
According to a Telegraph analysis of Homes England data, nearly 94,000 homeowners who bought with Help to Buy have not paid off their equity loans and will reach the end of their interest-free periods between April 2023 and 2025.
Within this group, there are around 11,000 first time buyers who have bought in London and will have to start paying interest on the 40% equity loans.
The typical first-time buyer who bought a London home using Help to Buy with a five-year fix-up in 2017 will see their monthly payments rise by 71% when they reach the end of the interest-free period – an extra £725 per month, according to Hamptons Analysis. This assumes they refinance at 5.8% and takes into account the fact that they have paid off some of their loans.
Distressed homeowners still have a very long way to go before they can be repossessed. Lenders offer a massive package of support, which includes allowing homeowners to temporarily transition to interest-only payments or extending their mortgage terms.
However, these are not long-term solutions if interest rates remain higher for a longer period – The Bank of England warned that the base rate could remain above 5% until 2026.
“You can’t hide from the shock of high interest rates forever,” says independent economist Ian Mulhern.
Perhaps forbearance measures will stop an immediate crisis, but one way or another families have to be able to afford and pay off mortgages.
“You may be able to throw the can on the road, but at some point banks and borrowers have to put things on a more sustainable footing over the long term.”
It’s not just a help for struggling buyers. Other first-time buyers who bought during the height of the pandemic boom are at particular risk.
Samuel Mather-Holgate, of Mather Murray Financial brokers, says: “Over the past three months we have spoken to dozens of clients who are now actively looking to sell their properties, only because they cannot afford to pay.
“I’ve had many customers cry. It’s really a big part of the market and if you were to rank these sellers in the recovery numbers, it would be ringing alarm bells.”
Mather Holgate deals with a young family who bought their first house in Oxford three years ago. When the fixed rate deal ended, the mortgage rate jumped from 1.6% to 6.5%. This means monthly payments rose by 120% to £1,400.
“They are looking to sell their homes and move out of the area to somewhere cheaper,” he says.
John Corben, of Corbens Estate Agents in Swanage, He says second home owners are also selling.
“People are putting their properties up for sale because they know we’re going through a tough time, and so it’s better if they do it sooner rather than later,” he says.
Owners are suffering, too, Mulhern says. Buy-to-let loans are excluded from the mortgage covenant, under which distressed borrowers are entitled to support from banks, and most landlords on interest-only deals, which would see much larger proportionate increases in costs.
This wave of downsizing is visible in market data. Despite the drop in home prices, the number of new listings coming to the market hit the highest level since March 2021 in June, according to real estate website Zoopla. The number of homes on the market reached the highest level since November 2020 last month.
A spokesperson for the Department of Settlement, Housing and Communities said supporting aspiring homeowners is a government priority.
They said, “Help to buy an interest-free equity loan for the first five years, after that, a monthly interest fee of 1.75% of the loan is paid, which is a much lower rate than current mortgage products.”