The cost of living is rising at the fastest rate in the UK since the 1970s. The inflation rate, which is the measure of price rises, is currently at 9.1%. Basic commodities that we all need to live are more expensive than this time last year, and the rate continues to rise month on month. There is also the prospect of higher taxes for many workers.
For example, petrol rose by 18.1p in June, and energy bills have more than doubled for many people, with the threat of more steep rises to come in the autumn. Basic items that most of us put in our supermarket baskets every week, such as eggs, milk, pasta, and olive oil, have all risen by over 15% in price over the last year.
The situation is made worse for many people, because wage rises are not keeping up with the cost of living. All this is bad news for the average person, but if you are hoping to buy your first home this year, then it presents some extra challenges.
Firstly, mortgage rates are now less favourable than they were this time last year. This is because the Bank of England has put up the interest rates for the fifth time in a row, and currently it stands at 1.25%. This is to help bring inflation down, but it does mean that the interest rate on mortgage repayments will go up.
All this means that there are far fewer low-rate mortgage deals on offer at the moment. The Guardian reports that the average two-year fixed rate mortgage, assuming a 25% deposit, has jumped from 1.2% to 2.63% in less than a year. The last time such fast rate increases were seen was over 25 years ago.
Despite all the pressures on mortgage rates and the cost-of-living crisis, house prices have continued to climb, and have reached a new high of £271,613 in June. Experts are predicting that prices will eventually begin to drop, but there is such a mismatch between demand and supply of housing stock in the UK, that this is not expected to be significant.
How does this impact on first time buyers?
The rising house prices that first time buyers will need a bigger deposit to be eligible for a mortgage. Typical deposits are normally in the region of 15% of the value of the home, and the minimum deposit is 5%. However, the higher your deposit, the lower your monthly mortgage repayments will be.
Mortgage applicants will also be subject to an affordability assessment by the lender, to make sure that they are capable of meeting the monthly repayments. The lender will typically look at proof of a stable income and expenditure rates, including wage slips, tax returns, and bank statements.
The credit score, which lists any debts and missed repayments, will also be taken into account. In the current economic circumstances, applicants with squeezed incomes may find that meeting all the criteria is more of a challenge than ever.
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