The true cost of the mortgage spike: Why those buying a home face paying far more than five years ago

Borrowing to buy a home is now much more expensive than it was five years ago. 

Mortgage rates are back on the rise while house prices remain stubbornly high, despite many sellers struggling to shift their homes in a crowded market.

Five years ago the cheapest mortgages were below 1 per cent, but now buyers are lucky if they can bag a deal below 5 per cent. 

This is because many lenders put up rates on the back of the conflict in Iran and renewed inflation fears. 

What's more, while property prices have dipped in parts of London and the south, they have risen in most areas over the last five years.

The average UK property has increased by 11.5 per cent from £267,587 to £298,441 during that time, according to Lloyds Bank.

This means buyers need to stump up more for a bigger deposit, take out a larger mortgage and pay much more each month for doing so.

All in all, the mortgage needed to buy a home with a 20 per cent deposit is 64 per cent more expensive than it was five years ago, This is Money's analysis shows. 

Those moving home might be able to bridge the gap if the property they are selling has risen in value since they bought it.

But for many, particularly first-time buyers, raising a deposit today is harder due to how much more expensive everything else has become.

What £10 could have bought someone in 2021 now effectively requires £12.86 on average thanks to surging inflation, leaving them less to put aside in savings. 

The typical household energy bill has also surged, going from £1,138 per year in 2021 to £1,723 now. 

While average wages have increased, much of the benefit will have been nullified by higher taxes and frozen tax thresholds.

William Coe, a mortgage adviser at broker Cleerly, says: 'Items now are 25 per cent more expensive than they were five years ago. 

'However, incomes have not increased at the same level, so living costs remain significantly higher relative to baseline earnings.

'As a result, buyers have no choice but to settle for comparatively smaller or cheaper homes.'

How much more expensive is it to buy with a mortgage in your area?

Experiences will vary across the country depending on how large someone's deposit is and what has happened to house prices where they live.

For those with a 10 per cent deposit, the jump in costs is slightly less acute – the mortgage costs being 55 per cent higher and the deposit 11.5 per cent more expensive than in 2021.

For example, someone buying a £300,000 home with a 10 per cent deposit would require a mortgage of £270,000 and a deposit. 

The lowest rate available to someone buying five years ago with a 10 per cent deposit was 2.16 per cent, according to Moneyfacts. On a 25-year repayment term that would have cost them £1,165 a month.

Today, the lowest five-year fixed rate for someone buying with a 10 per cent deposit is 5.25 per cent and the £300,000 home in 2021 costs £334,500 requiring £3,450 more for the £33,450 deposit and mortgage covering £301,050.

The same buyer would pay £1,804 a month for exactly the same property today, a rise of £639 a month or £7,668 a year.

Second steppers squeezed 

The situation is no better for those with bigger deposits, for example 'second steppers' upsizing from their first home to a larger family house. 

Our analysis shows someone with a 20 per cent deposit will typically be paying around 64 per cent more towards their mortgage and 11.5 per cent more on their deposit in order to buy the same home they might have bought five years ago.

An even bigger cost leap is required for those buying with a 40 per cent deposit. The lowest five-year fix in October 2021 was 0.98 per cent, according to Moneyfacts, compared to 4.93 per cent today.

Factoring in average house price growth and higher mortgage rates, the cost of buying the same home today is around 72 per cent more expensive on the mortgage front alongside the additional amount required for a deposit.

Someone looking to buy a £500,000 property five years ago with a 20 per cent deposit could have secured a five-year fixed rate of 1.49 per cent five years ago.

On a 25-year repayment mortgage of £400,000 that would have cost £1,598 a month.

Fast forward to today and that £500,000 home has risen to £557,500. The buyer today has to find an extra £11,500 to put towards their deposit while they require a mortgage of £446,000.

Today the lowest five-year fixed rate for someone buying with a 20 per cent deposit is 5.05 per cent.

On top of the extra deposit funds, this means the same buyer will be paying £2,621 a month to buy that same property, representing some £1,023 more each month, or £12,276 a year.

Time to bag a bargain? 

Even compared to the start of the year the situation has worsened for home buyers.

While average house prices are broadly flat, mortgage rates have risen.

In February, buyers with a 20 per cent deposit were able to secure rates as low as 3.91 per cent while those with a 40 per cent deposit could secure rates of 3.7 per cent, according to Moneyfacts.

Today these buyers face the prospect of paying more than a percentage point more.

Someone buying with a £300,000 mortgage and a 3.91 per cent fixed rate would have paid £1,569 a month in February. Now, on the best 5.05 per cent rate, they'll pay £1,763 a month.

Net mortgage approvals for house purchases – an indicator of future borrowing – decreased to 54,900 in August, according to the Bank of England, down from 55,900 in July and below an average of around 60,100 over the previous six months. 

Rachel Springall, finance expert at Moneyfacts says it's not surprising that prospective buyers remain cautious about making a large financial commitment, but suggests there is also an opportunity in the current market to bag a bargain.

'There is no denying that those who can afford to buy have more bargaining power when demand remains weak and house prices are under pressure,' she says. 

The average property is now selling for 90.6 per cent of its original asking price, according to data from Knight Frank. 

It means the typical home first listing at £300,000 is going on to sell for £271,800. 

At this time in 2022, the typical home sold at no discount at all to the list price. 

However, if mortgage rates keep rising the benefit of price reductions could quickly be cancelled out. 

'First-time buyers with a sizeable deposit might be able to find a more affordable home due to flatlining house prices, but higher mortgage rates risk undermining that affordability boost,' says Springall.

Anyone looking to buy a home with a mortgage right now is facing an expensive new reality check. 

While some buyers will be weighing up whether they can afford the required mortgage on the higher rates, others will feel they can simply no longer buy the type of home that might have been imaginable back in 2021.

Buyers are divided into two camps, according to mortgage brokers. Some are holding off waiting for mortgage rates or house prices to fall. 

Others are buying because they're fed up with waiting and there are also those who sense an opportunity to bargain hunt.

Mortgage broker William Coe has noticed the desire to buy remains strong among those renting – but for those who either already own or who live with family, this desire is much more muted.

'New buyers are accepting of current mortgage rates and aware that the alternative is to continue renting - costs which are increasing because landlords are passing on the cost of higher interest rates,' says Coe.

'What I have seen is that if people are in a position where they don't have to move, they are much more likely to stay put - those living with family or making do with their current property.'

Should you wait to see if house prices fall?

House price growth has been sluggish in recent years, with some areas registering falls. 

It could be tempting for some would-be buyers to hold off and see if they fall further. 

Mortgage broker William Coe suggests those delaying might end up regretting their decision, however.

'House prices have historically trended upward over the long term; while there can be minor short-term adjustments, over five years, prices will likely be higher still, meaning today's costs will seem like a bargain in comparison,' he says. 

'You can haggle hard, but the honest truth is that a property is only worth what someone is willing to pay for it. If you aren't happy with the price, you don't have to buy. 

'Likewise, if you can negotiate a lower price, do so, but the vendor doesn't have to sell at a lower price if they don't want to. Right now, we are in a quiet market where there aren't a lot of buyers, but there also aren't a lot of sellers.'

Chris Sykes, a mortgage adviser at MSP Financial Solutions also warns against trying to time the market. 

'It's very hard to time the market, and when the bottom of the market is announced it's too late to try to take advantage of it,' he says.

'Property these days should be purchased for the long term. With the costs of moving so high, gone are the days you'd buy a small flat for two or three years and then upgrade to a larger one a few years later.'