Mortgages for first-time buyers: a guide to buying property amid rising interest rates

Even in a competitive mortgage market, there are options for first-time buyers who have saved a deposit  (Matt Writtle)
Even in a competitive mortgage market, there are options for first-time buyers who have saved a deposit (Matt Writtle)

Amid record-high inflation and escalating costs of living, the Bank of England raised interest rates again last week.

Rates have edged up six times since December from a historic low of 0.1 per cent to 1.75 per cent, to curb escalating inflation and the cost of goods. The most recent increase is the first half point rise for 27 years.

On one hand the cost of goods, services and energy — with inflation at a 40-year-high — is cooling the hot housing market. On the other hand, rising interest rates are pushing people to try and secure their first mortgage or fix their current mortgage in case such hikes continue.

To encourage wannabe homeowners and make it easier to borrow the Bank has also removed the requirement for lenders to impose an affordability test, which forced lenders to assess whether potential borrowers would be able to afford an interest rate hike equivalent to three per cent.

However, despite the Bank’s efforts to relax requirements and make it easier for first-time buyers to borrow high loan-to-value mortgages, the number of available products has fallen for four consecutive months.

According to new data out today from the broker website Twenty7Tec, products are at their lowest since September 2021.

“From the end of June to the end of July 2022 we saw the largest monthly drop in real terms of mortgage products available since the pandemic-induced handbrake stop in March 2020 which saw the removal of almost 3,000 products over night,” says James Tucker, chief executive of Twenty12Tec.

It’s a confused picture and it’s easy to see why first-time buyers might be unsure whether to take the plunge now.

Is now the right time to buy a home?

House price momentum has started to slow and reverse according to the Halifax. The lender reported a 0.1 per cent fall in house prices across the UK in July: the first monthly decline in 13 months.

The Halifax data showed that annual house price growth (the percentage the average house price increases by over 12 months) had slowed from 12.5 per cent to 11.8 per cent in the year to July with the slowest rate of growth in London. The average national house price sits at £293,221 and £551,777 for London.

The number of mortgage approvals has started to drop off too as the cost of living crisis bites. "The housing market lead indicator, mortgage approvals, has fallen for the last five months in a row, which implies that housing market activity is easing," says property analyst Anthony Codling, who runs the search website Twindig. He does not, however, expect a "significant price correction."

Recent reforecasting from Savills predicts that the average house price in London will rise by 3.5 per cent in 2022 by the end of the year, and fall by 0.1 per cent in 2023, before nudging up 0.5 per cent the year after. In total the agent’s analysts forecast total growth of five per cent over five years in the capital compared to 12.9 per cent across the country.

The softening market may give first-time buyers a window of opportunity before house prices start to rise again. They also may want to take advantage of the Government’s Help to Buy shared equity scheme which ends in March 2023 – the deadline to apply for a mortgage through this scheme is October.

Although the banks are limited on how many loans they can give out where the house price is more than four times earnings, there are a selection of products available. For more bespoke advice most brokers do not charge for an initial chat or advice but will charge an application fee or completion fee which tends to start around £495. However, in the long run a broker may help secure a better interest rate on a mortgage, saving far more than the fee.

Can first-time buyers still get mortgages?

The quieter summer months is a good time to apply for a mortgage as people head off on holiday and the housing market pauses, according to broker Andrew Montlake at Coreco. "The first thing is not to panic," he says. "Contrary to some reports lenders do still want to lend and the quieter summer period will give them a chance to improve their service levels," he says.

In most cases, first-time buyers can borrow between four and five times their income and high earners with an income of more than £100,000 could potentially borrow 5.5 times their earnings, Montlake continues.

Despite the Bank of England relaxing the stress test requirements, lenders are looking more carefully at affordability given rising living costs – but it is still the 10 per cent deposit that remains the biggest hurdle for first-time buyers particularly in London.

For example, to buy a home worth £300,000 in London a first-time buyer would need a deposit of £30,000 (10 per cent). The Loughborough Building Society is offering a five-year fixed mortgage at an interest rate of 3.25 per cent for 60 months, which then moves to 5.59 per cent variable. This is a monthly repayment of £1,316.

For the same £270,000 loan plus 10 per cent deposit HSBC is offering a two-year fixed rate of 3.49 per cent which changes to 4.54 per cent (variable). A product fee of £999 does apply though. Use the mortgage tool on to compare deals.

Montlake says that most first-time buyers have around a 10 per cent deposit and the majority lean on the bank of mum and dad, or a gift from grandparents.

Is Help to Buy still available?

For those with a five percent deposit, Help to Buy (the Government’s shared equity scheme) is available to apply for until the end of October with a hard stop to have processed the sale by its final deadline of the end of March 2023.

This means these first-time buyers can apply for a government loan to enable them to buy a new-build property only. After five years they have to start paying it back.

The Government will lend up to 40 per cent of the price of the property in London, so with a five per cent deposit this means the buyer has to secure a mortgage of 45 per cent the value.

There are one-bedroom apartments available at Dock East in Canary Wharf for £384,500, meaning a buyer would need a five per cent deposit of £19,225 to access a Help to Buy loan.

Homes at Hale Works in Tottenham are slightly cheaper with one-bedroom flats from £370,000. Green Quarter in Southall has apartments for £297,500, requiring a deposit of £14,875. The JLL website lists Help to Buy schemes (

In Barking, which is undergoing huge redevelopment, are one-bedroom homes being built for £332,000 at Abbey Quay by the housebuilder Weston Homes. The developer is working with the local council to offer homes here at a reduced rate (called discounted market sale) where homes are being sold to Londoners for 80 per cent the value. Weston is also offering a £10,000 gift towards moving costs (

For those who want to buy a second-hand home then there’s the Government Mortgage Guarantee Scheme which is running until December 31 this year. It offers a 95 per cent loan-to-value mortgage with a five per cent deposit and was introduced during the pandemic.

However, it has been overshadowed by Help to Buy which is far better known and lenders are offering their own 95 per cent loans.