Despite falling prices month after month, the housing market has so far avoided the most pessimistic forecasts of a market crash.
Mortgage repossession rates are at all-time lows, lenders have taken a range of measures to ease the pain of higher interest rates, and price declines have been gradual so far.
But the modest price drops mask churn beneath the surface. Homeowners coming to the end of fixed-rate deals are increasingly choosing to sell long before they’re forced to, given the writing on the wall of higher mortgage rates.
New buyers who bought using the Help to Buy stock lending program are on the cutting edge.
“Help to Buy encouraged people to buy property they couldn’t afford. Many of these people are now looking for a new mortgage and they are failing the affordability tests at all,” said Ranald Mitchell of Charwin Private Clients.
“Since they bought, they’ve added two cars, two kids, loans and credit cards to their lives, plus Help to Buy interest payments are starting.”
Under the scheme, which closed in March, buyers could buy a new build home with a 5 per cent down payment and a 20 per cent government-backed loan, or 40 per cent for those buying in London. This loan was interest-free for the first five years. After that, 1.75 pc. interest – a rate that then rises by a measure linked to inflation.
The interest is much lower than the current mortgage interest. But the payments have a cumulative effect. They’re hitting new homeowners just as their fixed rate deals are expiring and their mortgage payments are skyrocketing.
The rise in costs is beginning to push first-time homeowners to downsize, a position most would never have predicted when taking their first step up the property ladder.
“We see people who can’t be helped and really think, let’s just start over and buy something we can afford,” says Mitchell.
Darryl Dhoffer, of The Mortgage Expert Group, knows a young couple with two children who sell and move back in with relatives after seeing costs rise.
The young family bought a three-bedroom house in the South East for £300,000 with a 20 pc. Help to Buy loan and took out a mortgage five years ago at a rate of about 2 pc.
However, their mortgage rates would rise to 5 percent after their five-year fix expired two months ago. Monthly payments would increase from £712 to £1,085. In addition, they had to start paying almost £100 a month in interest on their equity loan.
“It just wasn’t possible for them,” says Dhoffer.
Nearly 94,000 homeowners who bought through Help to Buy have not yet repaid their equity loans and will reach the end of their interest-free period between April 2023 and 2025, according to Telegraph analysis of Homes England data.
Within this group, there are about 11,000 new buyers who have bought in London and will have to pay interest on equity loans at 40 per cent.
A typical first-time buyer who bought a London home using Help to Buy with a five-year fixed term in 2017 will see their monthly payments rise by 71 per cent when they come to the end of their interest-free period – an extra £725 per month, according to analysis by Hamptons. This assumes they refinance at 5.8 percent and explains that they have paid off part of their loan.
Struggling homeowners are a long way from being possessed. Lenders offer a huge package of support, including temporarily switching to interest-only payment or extending their mortgage.
However, these are not long-term solutions if interest rates remain high for longer – and the Bank of England has warned that base rates could remain above 5% until 2026.
“You can’t hide forever from the higher interest rate shock,” says independent economist Ian Mulheirn.
“The respite measures may stop an immediate crisis, but somehow households need to be able to pay and pay off their mortgages.
“You may be able to kick the pot down the road, but at some point banks and borrowers need to put things in a more sustainable long-term way.”
It’s not just helping buyers who are struggling. Other starters who bought during the peak of the pandemic are at particular risk.
Samuel Mather-Holgate, of Mather Murray Financial brokers, says: “Over the past three months we have spoken to a dozen or so clients who are now actively considering selling their properties only because they are unable to make the principal payments.
“I have had several clients in tears. It’s a very large part of the market and if you were to classify these sellers in the repossession numbers it would set alarm bells ringing.
Mather-Holgate has dealt with a young family who bought their first home in Oxford three years ago. When their fixed-rate deal expired, their mortgage interest rate rose from 1.6 to 6.5 percent. This meant monthly payments increased by 120 per cent to £1,400.
“They want to sell their house and move to a cheaper place,” he says.
John Corben, of Corbens estate agents in Swanage, says second home owners are also selling.
“People are putting their homes up for sale because they sense we’re going through a tough time, so they better do it sooner rather than later,” he says.
Landlords are also having a hard time, says Mulheirn. Buy-to-let mortgages are excluded from the mortgage charter, under which borrowers in difficulty are entitled to support from banks, and the majority of landlords have only amortization agreements, which will increase costs much more.
This wave of downsizing is reflected in market data. Despite falling house prices, the number of new homes entering the market in June reached the highest level since March 2021, according to real estate website Zoopla. The number of homes for sale reached the highest since November 2020 last month.
A spokesperson for the Department for Leveling Up, Housing and Communities said supporting aspiring homeowners is a government priority.
They said: “The Help to Buy Equity Loan is interest-free for the first five years and then a monthly interest payment of 1.75 percent is due on the loan, which is a significantly lower rate than current mortgage products.”
Expand your horizons with award-winning British journalism. Try The Telegraph for 1 month free, then enjoy 1 year for just $9 with our US exclusive offer.