Passing on full interest rate cut would make UK homes more affordable, research points out

First time buyers in London could save up to £518 a year on mortgage payments and up to £244 in England and Wales, if the latest rate cut was passed in fully by lenders, new research has found.

A full transfer of the Bank of England’s 0.25% rate cut would bring the mortgage rate down to 2.2% on the average first time buyer loan of £159,381 cutting annual mortgage payments by 3%, according to the study from Hamptons International.

It explains that this extra affordability could allow new buyers a greater choice of property to buy and while deposits remain the biggest hurdle for new buyers, conditions have improved a little.

For example, the time for an average young couple to save a deposit for their first home fell to five and a half years in the second quarter of 2016, down three months compared with last year. However, in London the average couple would need nine and a half years.

The study also looks ahead to a potential additional cut and says that bringing interest rates down to 0% would mean an average mortgage rate of 1.9% and this would reduce a first time buyer’s annual mortgage payment by £484 in England and Wales and by £1,028 in London.

It says that lower mortgage rates will cushion the effect of rising inflation on essentials, such as food transport and utilities, caused by the fall in Sterling after Brexit and the lower cost of debt servicing will allow those with the necessary deposit to be able to start the home ownership journey sooner.

However, despite falling mortgage rates, continued house price growth in the last year has led to higher mortgage payments for new home owners. But wage growth and lower inflation have helped to offset the impact on household incomes.

The research also shows that an average young couple working full-time can save a 15% deposit three months faster than last year, but it still takes five and a half years. The time it takes for a single first-time buyer is unchanged from last year at 10.3 years.

In London, a couple can save a deposit in 9.5 years while a single buyer would need 14 years. The time to save for a couple is unchanged from last year and a single first time buyer can save a deposit three months faster.

‘The Bank of England’s rate cut and, more importantly, its new Term Funding Scheme, which incentivises banks to pass on the cuts and lend, should brighten the financial outlook for new home owners,’ said Fionnuala Earley, director of residential research at Hamptons International.

‘Hints that there could be another cut could be a bonus for new buyers. If the hint becomes a reality, new buyers nationally could see their mortgage bill reduced by almost £500 a year and £1,000 for those in the capital,’ she explained.

‘While the rate cut does little for those still saving for their first home, there is some respite as the rate of house price growth is slowing and prices are expected to fall slightly in 2017. Providing incomes continue to rise, their ability to save will improve, meaning the dream of a new home could become a reality a little sooner,’ she added.

Hamptons International’s Ability to Buy research is the only affordability analysis which takes into account the pressures buyers face in the cost of living as well as changes in interest payments and house prices. It includes both the time it takes to save for a deposit and the affordability of mortgage payments.