Rising interest rates make things difficult for first time property buyers

With the Bank of England recently announcing another rise in interest rates, there has been mounting pressure on some households' finances. In April, interest rates rose to 5.5%, and some financial analysts believe that a further increase is already likely, with rates reaching 6% before the end of the year.

Meanwhile, recent figures released by the Council of Mortgage Lenders (CML) show that first-time buyers are borrowing on average 3.33 times their income to buy a new house, with interest payments accounting for 18.7% of the average first-time buyer's income - the highest proportion since 1992. Furthermore, the CML findings also suggest that the average mortgage taken out by first-time buyers between 2005 and 2006 increased by 11.72%, while income rose by only 9%. Similarly, in March 2007, the average first-time buyer mortgage was 9.96% higher than the same period last year, but income only increased by 5.89% in comparison.

As a result of the rises in interest rates over the past year, fixed-rate mortgages have become extremely popular with home buyers as they seek to stabilise their borrowing costs, and this type of mortgage currently accounts for 78% of all new mortgages arranged. However, the CML have warned existing homebuyers to prepare for higher repayments if their current mortgage deals are likely to expire in the next year or so. CML claim that 1.3 million people took out a fixed-rate mortgage in 2005, with a further 1.5 million doing so last year, and the body estimates that most of these borrowers will see their mortgage rates rise by up to 1.5%.

Rapidly rising house prices is also forcing more first-time buyers to pay stamp duty when purchasing their first home, with the proportion of those who purchased a property valued above the threshold rising to 58% in April this year - up from 51% a year ago.

The rise in interest rates has resulted in many home buyers struggling to make the step onto the property ladder. With many first-time buyers using either all or most of their savings to use as a deposit, taking out 100% mortgages or in some cases asking family for financial aid, it is now especially important to shop around for a competitive mortgage. First-time buyers are particularly attractive to lenders, and most mortgage providers have special deals and mortgage rates available for first-time buyers.

If you are in the market for a first-time buyer mortgage, don't just grab the first mortgage you can. Instead, explore all the possible mortgage options to find the best one for your needs - it could save you a lot of money!