A Mortgage Dilemma for First-Time Buyers

A Mortgage Dilemma for First-Time Buyers

A Mortgage Dilemma for First-Time Buyers

There is uncertainty regarding interest rate and inflation which has led to a range of different forecasts for the UK housing market in the short to medium-term. This has placed first-time buyers in a challenging situation, looking to benefit from falling house prices but uncertain about the type of mortgage to consider. While important to take financial advice regarding your own situation, there are a number of options.


UK housing market

It is easy to forget that just a few months ago, the Bank of England suggested the UK would face a deep recession that could last up to two years (and even beyond). Fast forward, and while the economy is facing numerous challenges, there is optimism that the UK will avoid a technical recession. However, the recent increase in interest rates and the ongoing cost of living crisis are impacting the demand for property. 


At this moment in time, opinion is certainly divided as to the short-term outlook for UK house prices, with a range of forecasts:

  • Nationwide is forecasting a fall in prices of up to 10% in 2023
  • Lloyds Bank is a little less pessimistic, expecting prices to retreat by 8%
  • Zoopla believe that prices will fall by just 5% in 2023


On the one hand, a fall in house prices is positive for first-time buyers, although interest rates may have further upside before peaking. 


Mortgage options for first-time buyers 

The uncertainty surrounding interest rates which will have a direct impact on mortgage rates. To put this into perspective, the Bank of England has taken a cautious approach with regard to interest rate forecasts, predicting:


  • 4.3% in the first quarter of 2024
  • 3.6% in the first quarter of 2025
  • 3.3% in the first quarter of 2026


However, companies such as ING believe interest rates will peak at 4.25% in 2023, falling to 3.25% in 2024 and as low as 2.5% in 2025. Understandably, many first-time buyers are concerned about fixing their mortgage rate near the peak before significant interest rates fall in the short to medium term.


Variable-rate mortgage

The average first-time buyer mortgage currently includes a fixed rate of up to five years. However, in the current climate, many may be looking towards a variable rate mortgage in the short-term. If UK base rates were to fall as expected, there may be the opportunity to refinance on a fixed rate at lower levels. While broadly linked to base rates, there is a degree of discretion for the mortgage lender, which can result in a more competitive headline rate


Fixed rate mortgage

Amid the uncertainty with regards to interest rates, some first-time buyers may look towards a short-term fixed-rate with the intention of refinancing if rates were to fall. Alternatively, those who are a little less positive on the direction of interest rates may look towards a longer term fixed rate, providing an enhanced degree of certainty.


Tracker mortgage

A hybrid option of the two would be a tracker mortgage, where the rate would vary depending on a core rate, such as the Bank of England base rate. This would remove the degree of discretion from the mortgage lender, ensuring that the rate mirrors movement in the core measure. However, there is still a degree of market risk with this option.


Aside from the affordability factor, there are two main issues to consider with regards to mortgage terms:-

  • Direction of interest rates in the short to medium-term
  • Degree of certainty required by first-time buyers


First-time buyers willing to take on a degree of risk may look towards variable-rate and tracker mortgages with the idea of benefiting as rates fall. Those that require a degree of security, allowing them to plan ahead with their financial budget, may prefer the certainty of a fixed rate. 



Even though first-time buyers stand to benefit from ongoing house price weakness in the short-term, this is partly offset by rising interest rates and uncertainty about the foreseeable future. There are numerous options to consider and it is important to take advice from your financial adviser to identify the most appropriate solution for your situation.


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Posted in Mortgage