The three bank rate rises since last summer have started to have an effect on house prices and borrowing.
Mortgage specialists are predicting another rate rise in the coming months and some buyers are looking for safe options when choosing how to borrow money.
Figures from the Royal Institution of Chartered Surveyors show that house prices rose for the 17th consecutive month in March with the pace of the increase getting faster for the first time in five months.
Spokesman Jeremy Leaf says: “The housing market has absorbed the initial interest rate barrage but history tells us that further rate rises could knock confidence and activity later in the year. House prices are unlikely to fall in the short term while the economic outlook remains robust.”
RICS reports that the number of houses that remain unsold is at its lowest level for almost three years and shortage of supply is partially responsible for keeping prices on the rise.
Leaf says: “Market conditions remain tighter than ever, with households under no pressure to sell, although mortgage repayments remain a concern for many following the Bank of England’s recent monetary tightening.”
RICS reports that the number of enquiries from first-time buyers has declined for the fourth consecutive month and this is particularly acute in the South-east and London.
London estate agency Haart says the number of FTBs is at its lowest level for a year, having dropped below 25 per cent of the market.
Haart chief executive Paul Smith says: “The confidence of first-time buyers remains dented as they continue to be priced out of the market. This group needs a period of stability to reinstate their confidence.”
The Council of Mortgage Lenders says the base rate increases and the possibility of more to come have pushed the number of first-time buyers taking out fixed-rate mortgages to record levels. Data for lending in February shows that 87 per cent of FTBS chose a fixed rate, up from the previous record level of 84 per cent in January.
Director general Michael Cooper says: “With the chance of at least one more interest rate this year, firsttime buyers are taking the sensible option of taking out fixed-rate deals and locking into the payment security they provide. First-time buyers are the most financially stretched group and the fact that a record number of them are choosing a fixed-rate deal demonstrates their desire to plan ahead and avoid the risks of rate rises.”
But several commentators are predicting that interest rates have now reached or are close to their peak.
John Charcol senior technical manager Ray Boulger says that with many lenders expecting a further rate rise, fixed rates may not be the best deals to take.
He says: “The market is fully discounting one more bank rate increase and so this is already priced into most fixed rate mortgages. However, many borrowers will still prefer a fixed or capped rate for the budgeting certainty and consequent peace of mind they offer.
“As bank rate is probably close to its peak, borrowers who do not need the security or comfort of a fixed rate should consider a tracker mortgage, so as to benefit from any bank rate falls next year.”
For many borrowers, the vulnerability that comes with a tracker mortgage means this is not an option. Some lenders are reporting that the increased cost of borrowing is putting people off buying.
Abbey head of mortgages Nici Audhlam Gardiner says: “The elevated costs and expected interest rises are threatening to homebuyers and it is not surprising that our mortgage research has shown that 2.1 million people are put off homebuying because they cannot find the right mortgage.”
Gardiner says Abbey, like many other lenders, is seeing a strong preference for fixed-rate deals. She says: “First-time buyers in particular are looking for more repayment security, as they are more likely to be borrowing at the top end of their affordability levels and any fluctuation may force them into arrears.
“The sensible options in such cases is to choose a fixed-rate mortgage and if circumstances change two or three years down the line, then change to another mortgage.”
But, for many borrowers, even a fixed rate may be out of reach. New figures released by Halifax suggest average house prices are now unaffordable for 70 per cent of key workers such as nurses, firefighters and teachers.