Brokers believe the surprise base rate rise this month could cause the housing market to slow will particularly affect buy to let and first-time buyers.
London & Country mortgage specialist James Cotton says: “This is the third rate rise in six months. One rise on its own may not make much difference to repayments but three in six months will mean a significant rise, especially because the increase came straight after Christmas. It will hit people’s pockets but we will have to wait and see how much.”
Council of Mortgage Lenders’ statistics show that last November income multiples reached a record high at 3.29 times the average first-time buyer household income, up from 3.08 in 2005. The proportion of income used to pay mortgage interest payments also hit a new high at 17.8 per cent, up from 15.8 per cent the previous year.
CML spokesman Christo-pher Dean believes the latest rate rise will drive many people into arrears.
He says: “A lot of people on the periphery are falling into arrears and we think this will increase as people struggle even more to pay the mortgage and in the next 12 to 18 months this may filter through to repossessions. In 2006, we predicted 105,000 properties would be repossessed for at least three months, this year we are forecasting 130,000.”
Many commentators are expecting a further onslaught from the Bank of England in the coming months, which could bring an increase of 1 per cent in one year.
Hampton’s International Mortgages director Jonathon Cornell says: “It is impossible to rule out another rate rise unless inflation starts to come down quickly. Energy prices and petrol prices are coming down, which should help bring down inflation and lessen the need for another base rate increase. Hopefully, this last rise should rein in what they need to rein in and we can get back to a sustainable economy and more affordable mortgages.”
However, CML figures reveal that the number of first-time buyers is starting to rise again. In November last year, 37,000 loans were taken out by FTBs, an increase of 5 per cent on October.
Dean says: “There are very strong affordability pressures on first-time buyers but it is clear they are still very keen to get on the property ladder and they are finding ways to do so.”
But he adds FTBs need to make sure they can handle the costs of homeownership if rates rise again.
BM Solutions spokeswoman Claire Mortimer says: “I am sure that first-time buyers have noted the increase but if they are serious about getting into the market, I do not think it will necessarily affect their decision to buy.”
Cotton says fixed-rate mortgages, which make up 61 per cent of loans have become more popular since the general trend for base rate rises. Borrowers with a variable rate are being encouraged to switch to a fix in case rates keep climbing and many people are taking this advice.
Cornell believes FTBs could actually be better off with rising base rates because the growth of house prices will start to slow.
He says: “House prices will not increase as much over the coming year which will help reduce the competition between first-time buyers and landlords. Mortgages will be slightly more expensive but generally first-time buyers have trouble getting the deposit together but can make the repayments. I think this rate rise will actually help them.”
The CML also believes that prices will calm down. It is forecasting growth of only 7 per cent this year after 2006’s impressive 10.5 per cent increase.
But others point out that in recent years, predictions that the property price growth would slow have been swept aside as the market has shown remorseless growth by record increases there is scepticism that 2007 will be different.
Cotton says: “People thought house prices would slow last year but they were still very strong and mortgages are very expensive. We will have to wait and see what effect the rate rise will have on the market and house prices before we see the effect on first-time buyers. It depends on consumer sentiment and how people react to the rise.”
Gross annual yields for buy-to-let investors are now just 5.06 per cent, according to the Association of Residential Letting Agents, and with 30 per cent of the rent knocked off for maint-enance, an average BTL inv-estment now delivers a net yield of only 3.5 per cent.
Cotton says: “There will be landlords who will feel the latest rate rise, particularly people who have recently moved into the sector. Some people might find they will have to make up the difference between their mortgage payment and the rent they receive.”
Mortimer points out that many landlords are on fixed rates and will not affected at present.
She says: “With buy to let, it depends on how they view their investment. Most landlords are on fixed-rate mortgages if they see it as a genuine investment. I also do not think people will be put off moving into the sector because most buy-to-let investors are looking for long-term gains.”
Cotton considers there is a positive effect of the base rate rise as he believes the media attention could encourage people to shop around for a better-value mortgage.
Mortimer says: “I think it will incite a lot of people to look at their mortgage payments and the rate they are paying, which is no bad thing and will be a good opportunity for brokers.”