There are growing calls for the Bank of England’s Monetary Policy Committee (MPC) to cut the standard base rate. The current rate is 5.25% and has held steady for the last four consecutive meetings. The next meeting, in only a few weeks, is forecasted to follow the trend as inflation has remained at 4.0% for the last few months after rising from 3.9% in November. If anything, due to inflation remaining stubborn, some experts could be expecting a slight increase. Such a vote would likely kick inflation back onto the downward path it had followed last year.

However, the higher cost of borrowing is proving to be difficult for homeowners needing to remortgage following the end of their two-year fixed rate mortgage terms. For instance, those homeowners obtaining their two-year fixed mortgage in February 2022 would have chosen from options while the Bank’s base rate was at only 0.50%. Borrowing was cheap and homeowners benefitted from the opportunity. Now, they are burdened as they move off their low interest rate deal and face either a remortgage or a riskier and higher interest rate if their lender transitions them to their standard variable rate (SVR).

Not only are homeowners facing difficulties in affording their repayments, but many have fallen into arrears. 

The financial strains of homeowners are enough to cause some financial experts to call out the MPC to offer relief to borrowers even if it keeps inflation around longer.

There had been a competitive lending market offering lower rate offerings despite the MPC voting to leave the base rate steady. In January, lenders began to offer lower rate deals to gain the attention of borrowers in the hopes of stimulating the lending market. There were even mortgage interest rates below the base rate and some offerings were below 5.0%. However, lenders are now pulling their lowest interest rate deals as they perceive the risk of lending to be rising as inflation has stalled.

According to a recent report from the online property listing site, Zoopla, first-time buyers are finding starter homes at a lower cost than in previous months and certainly less than this time last year. Sellers, aware of the difficulty first-time buyers are having in saving for deposits and affording higher interest rate deals, are cutting their asking prices to find a sale.

According to Zoopla, first-time buyers are purchasing properties favored by first-time homeowners at an average of 8.0% below the local market average. This amounts to £20,300 as the average first-time buyer home amounts to £244,100, while the overall average house price is £264,400.

While the average price is lower than the overall market price for homes typically purchased by first-time home buyers, it is an increase of 1.2% or £2,800 over last year. 

Due to the difference in the base rate of the Bank in 2022 versus 2024, Zoopla reported first-time buyers are paying approximately 27% more for their mortgage than if they had bought their property in the last quarter of 2022. Yet, it is less expensive to be a first-time homeowner as rental costs have increased to an average of £1,221 per month while the average monthly mortgage repayment is £990.

Izabella Lubowiecka, senior property researcher at Zoopla, remarked, “We expect more first-time buyers to come to market in 2024, particularly in the second half of the year thanks to a combination of reduced mortgage rates, earnings growth and improved affordability. 

“But the reality is that many would-be buyers might be able to get on the ladder now by considering different property types or alternative locations that offer better value for money. First-time buyers are in a stronger position in the current buyer’s market, so we encourage them to be resourceful and assess all the options available to them.”

There is no doubt that home buyers are purchasing with the hope that inflation will soon be a part of the past and as it disappears so will higher interest rates. This would offer financial relief as a remortgage could offer a lower interest rate and save money. A remortgage would also offer the option of securing a fixed rate to lock in the chosen interest rate and shield them from rate hikes during the term of their deal.

This is a turn-around from two years ago when home buyers were likely not considering the base rate would grow from 0.25% in January 2022 to 5.25% only two years later and were confident when their term ended their new rate would be comparable and affordable.

Because many believe inflation will reach target by the second quarter of this year, when a two-year fixed deal expires in 2026 rates could hopefully be less expensive and a remortgage repayment could be more affordable than they are now. It is a strategy to buy at a cheaper cost, and hope for a remortgage with lower rates in a few years. 

While the remortgage could offer savings in a fast two years, or even sooner if the homeowner takes on a penalty to end their mortgage term early, the purchase prices of starter homes could continue to rise. It means taking on a short-term higher repayment for the possibility of saving by buying now with higher interest rates rather than possibly much higher house prices and higher deposits two years from now. 

Also, with rental costs higher the difference for some home buyers between rent and a mortgage could be a savings despite the higher interest rates.

The current housing market, lending market, and economy offers various outlooks and strategies for home buyers and whether they are buying now or waiting, the next MPC meeting and the next report on inflation could reveal if their strategy was sound.