Mortgage rates for first-time buyers have rocketed in the wake of the Covid crisis, dealing a major blow to Boris Johnson as he promises to get a generation of young people on to the housing ladder.
“Alarming” figures from the Bank of England show that borrowers with a small deposit are being billed an extra £100 a month on average as banks hike their interest charges to guard against the risk of a market crash.
The Bank’s mortgage data is likely to spark fresh fears that millions of families have been condemned to long-term renting by risk-averse banks and sky-high property prices, which hit an average of £250,000 last month, a record high, according to Halifax.
It also underlines the urgency of the Prime Minister’s pledge to help would-be buyers. Mr Johnson is considering using a controversial state guarantee to support riskier loans so banks are more willing to lend. Critics say it will push up prices.
Threadneedle Street’s figures showed the average cost of a two-year, fixed-rate deal for borrowers with a 5pc deposit jumped to a two-year high of 3.95pc in September, sharply up from 3.02pc in February.
Financial data firm Moneyfacts said the price hike meant buyers taking out a typical £200,000 mortgage would pay an extra £99.61 a month compared to before the pandemic in February, or £2,391 over the two years of the deal.
Mortgages are becoming dearer for all borrowers despite the Bank slashing interest rates to an all-time low of 0.1pc in March, as banks are spooked by a potential surge in unemployment.
A jump in the jobless rate will mean more homeowners fall into financial difficulty and struggle to pay their debts, as well as potentially pushing down house prices.
The average cost of a mortgage with a 10pc deposit also jumped to 3.32pc – the most expensive since 2015. The rising cost – up from 2.79pc in August – has added £55.32 a month to repayments on a two-year fixed deal, Moneyfacts said.
Simon Gammon, managing partner at Knight Frank Finance, said: “These figures will make for alarming reading both for hopeful first-time buyers and the Prime Minister, who is rightly concerned that so many young people are being locked out of the market.”
Economists also said the rising cost of loans is likely to bring the market back down to earth following a surge in activity triggered by a stamp duty holiday. Halifax said prices were 7.3pc higher than last year in September, the biggest annual jump since 2016 when Brexit uncertainty hit the market.
Samuel Tombs, chief economist at Pantheon Macroeconomics, said the price hikes “present a big hit to affordability, given that loan-to-income ratios are at a record high and mortgage terms have little scope to lengthen further”.
According to property website Rightmove, house-hunters have been seeking out a quiet life since lockdown, with searches for properties in small towns and villages surging.
The rise in demand triggered by the stamp duty holiday helped push mortgage applications to a 12-year high last month, Halifax said.
But estate agents have become more negative about the future of the property market. Firms polled by the Royal Institution of Chartered Surveyors said buyer enquiries, agreed sales and new listings continued to rise in September but warned the boom would soon fade.