Lifetime interest rate costs for recent first-time buyers have more than doubled, and brought their overall housing costs to a record high

Recent first-time buyers will be hit hard by surging interest rates, with their lifetime interest costs more than doubling over the past five years and their total lifetime costs reaching record highs, although coming house price falls will offer some respite to the next generation of homeowners, according to new Resolution Foundation analysis.

With the Bank of England raising interest rates to 3 per cent earlier this week, the research – drawn from the Foundation’s upcoming Intergenerational Audit – examines the impact of higher interest rates, and the possibility of falling house prices, on the lifetime costs of buying a house for recent and future first-time buyers (FTBs), 70 per cent of whom are under the age of 35.

Higher interest rates will affect over five million mortgagor households by the end of 2024. However, younger homeowners will be particularly hard hit, as they tend to be earlier in their mortgage terms – when interest forms the largest share of mortgage payments – and have bought at higher house prices, which means they are more highly leveraged than previous generations of first-time buyers.

Furthermore, with many recent first-time buyers having purchased a house at a time of record low interest rates – which were 0.25 per cent as recently as January 2022 – many will see their budgets facing a big shock given the scale of interest rate rises underway.

The report finds that, based on current interest rate expectations, young homeowners (aged 25-34) on variable rate deals, or rolling onto new fixed-rate deals, face average additional mortgage costs of £3,700 a year by the end of 2026 as a result of higher interest rates. This increase is equivalent to 8 per cent of their household income – more than double the income hit facing homeowners aged 55-64 (who are facing additional costs averaging £1,500, or 3 per cent of incomes).

These higher monthly mortgage costs over the coming years are set to more than double the lifetime interest costs incurred when buying a first-time property – from £67,000 to £145,000. They also bring the overall lifetime cost of a FTB property (including the capital needed for the deposit) to a record £318,000 – almost double the lifetime cost of a FTB property bought in 1974 (£160,000) or even as recently as 2000 (£147,000), after adjusting for inflation.

The report notes that some recent young first-time buyers may struggle to cover these rising costs, with first-time buyers currently borrowing almost three and a half times their income on average – a higher loan-to-income ratio than before the financial crisis, when the average loan was three times a first-time buyer’s income.

The report notes that expected falls in house prices – partly reflecting higher interest rates – are more likely to push younger homeowners into low, or even negative, equity. Based on Lloyds Bank’s central forecast of an 8 per cent fall in house prices over the next two years, over one-in-seven (16 per cent) 16-to-34-year-old mortgagors are expected to go into low (10 per cent or less) or negative equity.

However, falling house prices offer some benefits to the next generation of homeowners. Coupled with higher interest rates that will provide a higher return on savings, house price falls of 8 per cent would reduce the average required length of time to save for a 10 per cent deposit from 15 years in 2022 to 13 years in 2023, while the overall lifetime costs of buying a house for a first-time buyer in 2024 could fall back to their 2016 level (£275,000).

However, even if house prices fell by 18 per cent – Lloyds Bank’s worst-case scenario – nearly three-quarters (73 per cent) of young (25-to-34-year-olds) non-home-owning families would still have neither the savings nor the earnings to be able to purchase a house.

And with rents for new private tenancies rising by 10 to 12 per cent over the year to July 2022, many young people may not have the capacity to increase their savings to take advantage of falling house prices.

Sophie Hale, Principal Economist at the Resolution Foundation, said:

“Rising interest rates are particularly bad news for recent first-time buyers, with their lifetime interest costs more than doubling. Alongside higher mortgage costs, young homeowners are also in particular danger of low or negative equity as a result of falling house prices.

“The flip side is that falling house prices and higher returns on savings could lower barriers to home ownership for the next generation of first-time buyers, by making it easier for them to come up with a deposit on their first home.”