Higher interest rates mean first-time buyers, in particular, face paying significantly more mortgage interest. Our analysis has tracked what today’s average Generation Z first-time buyer, born between 1996 and 2015, would pay if they bought a home costing £305,000. Assuming they had a 10% deposit and a 30-year mortgage term, they would face mortgage repayments of £274,500. If interest rates remained around 6% over their full mortgage term, they would then pay an additional £319,000 in mortgage interest before their loan is paid off in 2053. This mortgage interest equates to 104% of the purchase price and means they would effectively pay for their home twice.
Meanwhile, the average Millennial born between 1977 and 1995 who bought in 2007 with a 10% deposit and a 25-year mortgage paid £186,000 for their first home in 2007. They will make £186,000 in mortgage payments and, if loan rates remain around the 6% mark, they will pay £107,000 in mortgage interest – or 58% of the purchase price – by the time their mortgage is cleared in 2032. If, however, rates fall to around 4% over their mortgage term, the mortgage interest would make up around 52% of their initial purchase price.
Now, for the average Baby Boomer, born between 1946 and 1964 who paid £22,850 for their home. Assuming they purchased their first home in 1983 with a 10% deposit and a 25-year mortgage term, they repaid this £22,850 by 2008 as well as £30,710 in mortgage interest on top. High mortgage rates mean that this interest represented 135% of the purchase price, so they were effectively paying for their home more than twice - similar to Gen Z's today.
All this means that, at 6% loan rates, Gen Z buyers are on course to pay proportionately more mortgage interest than Millennials, but less than Baby Boomers.
Crucially, however, while Baby Boomers faced higher mortgages rates, they also saw significant house price growth – and inflation – within the first few years of the home loan.This devalued their debt quite quickly. Indeed, a Baby Boomer who purchased in 1983 saw house price growth of 98% during the first five years of their ownership. Gen Z buyers getting on the housing ladder today are extremely unlikely to see similar levels of capital growth over the next few years, which increases the burden of their mortgage debt.
Rising interest rates are also pushing back mortgage freedom day – the date when a buyer has earned enough money to cover their mortgage payments for the year.
Today, higher mortgage rates mean that the average first-time buyer won’t have earned enough to pay off their mortgage until 17 July, a month longer than the same time last year when mortgage rates were lower. This is similar to 2008, in the midst of the Global Financial Crisis, but isn’t as late as autumn 1989 and early 1990 when the Bank of England had raised the base rate to almost 15% to try to face down high inflation. Back then, it was only in October that an average first-time buyer’s gross salary covered their loan repayments for the year.
The average mover today has also seen their mortgage freedom day pushed back to 27 April, 28 days longer than two years ago. This is also similar to the mortgage freedom date during 2008.