Those who do go ahead with a purchase are opting for longer mortgage terms due to the cost-of-living squeeze.

First-time buyers are delaying plans to purchase a home by nearly two years in the face of the cost-of-living squeeze.

Nearly three-quarters of people trying to get on to the property ladder say their goal has been impacted by rising prices, according to research by mortgage lender Aldermore.

A third of prospective first-time buyers have put their plans on hold, expecting an average delay of 20 months, while 19% are now looking to buy a cheaper home, and 64% have had to scale back the amount they save each month.

Those who do go ahead with a purchase are opting for longer mortgage terms to help make their monthly mortgage repayments more affordable.

A record 38% of first-time buyers and home movers opted for a mortgage term of 30 years or more in June, figures from trade body UK Finance showed.

Why is this happening?

Inflation, which measures the rate at which the cost of goods and services increases, is currently running at a 40-year high.

The situation impacts first-time buyers in two ways.

On the one hand, higher prices mean first-time buyers have less money to set aside towards a deposit after they have met their essential outgoings.

At the same time, the Bank of England is increasing interest rates in a bid to bring inflation back down to its 2% target.

Rising interest rates have fed through into higher mortgage rates, effecting the amount first-time buyers can borrow.

Moving from a 2% mortgage rate to a 5% one means the average first-time buyer will need an addition £21,250 a year in income for repayments to remain affordable.

What can first-time buyers do?

If first-time buyers are struggling to meet lenders’ affordability tests, they have three options.

They can buy a cheaper property, save a larger deposit – both of which will reduce the amount they need to borrow – or they can bring their monthly repayments down by opting for a longer mortgage term.

For example, if a first-time buyer purchases a property costing £269,000 with a 20% deposit, they will need a mortgage of £215,000.

If they opted for a typical two-year fixed rate deal with an interest rate of 5% and repaid their mortgage over the standard 25 years, they would have monthly repayments of £1,271.

But if they opted for a 30-year mortgage term, their repayments would fall to £1,165 per month.

Repaying their mortgage over 35 years would make monthly repayments even lower at £1,094.

But it is important to note that there is a downside to opting for a longer mortgage term, namely that you will pay more in interest over the life of your mortgage.

In the example above, you will pay a total of £162,060 in interest if you repay your mortgage over 25 years.

But the figure jumps to £200,500 if you repay it over 30 years, and £240,733 if you opt for a 35-year mortgage term.

What’s the background?

The rising cost of living and higher interest rates aren’t the only challenges would-be first-time buyers face.

Strong demand for property following the Covid-19 pandemic has sent property values soaring, with house prices rising by 8.3% during the past 12 months, according to our latest House Price Index.

Price increases have been even stronger for first-time buyer properties, with the average person now paying £269,000 for their first home, £33,000 more than a year ago.

But growth is expected slow going forward in the face of higher mortgage rates and rising living costs, as well as growing economic uncertainty.

Key takeaways

  • First-time buyers are delaying plans to purchase a home by nearly two years in the face of the cost-of-living squeeze
  • Nearly three-quarters of people trying to get on to the property ladder say their goal has been impacted by rising prices
  • A record 38% of first-time buyers and home movers opted for a mortgage term of 30 years or more in June