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Interest rates: Record rise in 30-year mortgages for first-time buyers

Nationwide mortgage shop with ATM and passing people Pleydell Court London UK. Interest rates have lifted mortgage costs
Interest rates: The proportion of mortgages borrowed over longer terms has increased almost continuously since the global financial crisis and accelerated sharply since 2021. Photo: PA/Alamy

Half of all first-time buyers in Britain, and over a quarter of home movers who took out a mortgage in the third quarter opted for a term of more than 30 years, as interest rates rise.

According to UK Finance’s latest household finance review, produced in collaboration with Accenture, this compares with around a quarter of first-time buyers and fewer than one in ten home movers doing so a decade years ago.

The proportion of mortgages borrowed over longer terms has increased almost continuously since the global financial crisis and accelerated sharply since 2021.

This reflects the knock-on effects of rising house prices and new mortgage rates on affordability.

Read more: UK average house price drops to £285,579 in biggest fall since 2008

But the data also highlighted that the average income of new borrowers has risen.

The average household income of a first-time-buyer mortgage application in the third quarter of 2022 stood at just under £60,000 – 17% higher than the same quarter last year.

During this time, wage growth sat well below this rate, indicating a shift towards higher income households entering the market as lower income earners struggle to get onto the housing ladder.

According to the review, house purchase activity remained on trend with pre-COVID-19 levels in Q3 this year, but demand is expected to weaken into 2023 due to stretched affordability in the sharpest cost of living crisis in a century.

Borrowing through personal loans declined in the period after strong growth in the first half of the year as people braced for tougher times ahead.

Watch: How does inflation affect interest rates?

Household savings remained static in the quarter as the rising cost of living put pressure on people’s ability to save.

Overdraft use continued to increase slightly, the data found, but because many people paid off their overdrafts during the pandemic, aggregate levels remain well below those seen before the pandemic.

Growth in outstanding credit card debt also eased following a strong previous quarter.

“This is likely to reflect a drop-off in discretionary spending, such as on travel,” UK Finance said.

Meanwhile, the long-term decline in interest-bearing balances stalled in the quarter, suggesting a small increase in some consumers being unable to pay off their credit card balances in full at month end.

Possession numbers remain substantially lower than previous normal levels. Possession is always a last resort, and those going through the courts at the moment are historic cases relating to long-term arrears built up over a period of years.

Read more: House prices: Higher mortgages stalling property market

“Cost of living pressures and changing employment patterns are likely to have an impact on demand and affordability going forward,” Eric Leenders, managing director of Personal Finance at UK Finance, said.

“At the same time, 1.8 million fixed rate deals are due to end in 2023, so refinancing levels will be robust. We would encourage customers to speak to a mortgage advisor and shop around for the best deal for their circumstances.

“Lenders are here to help. Anyone who is worried about their mortgage, loan or credit card payments, should speak to their lender as soon as possible to discuss the options available to help.”

Meanwhile, Krishnapriya Banerjee, a managing director in Accenture’s UK Banking practice, said: “Banks will need to address the twin challenge of supporting households through this uncertain economic period whilst ensuring they have sufficient operational resilience to handle the weight of growing customer demands.

“Digital tools that leverage artificial intelligence and behavioural economics can be used to help anticipate customers’ needs and assist those facing financial hardship.”

Watch: Will UK house prices ever fall?