According to a report from Nationwide Building Society, typical five-year fixed rates rose from around 1.3 per cent in 2021 and 2.9 per cent in mid-2022.
However, they surged dramatically after the mini Budget in late September, hitting their highest levels since 2010 and four times higher than the lows of 2021.
Andrew Harvey, Nationwide’s senior economist said that while wider financial market conditions had stabilised by the end of 2022, mortgage rates were “taking longer to normalise”.
The report said that first-time buyer mortgage payments, based on an 80 per cent loan to value (LTV) mortgage, were 39 per cent of take-home net pay. It added this was close to levels seen in the lead-up to the 2008 financial crisis.
Deposit still ‘major hurdle’ for prospective buyers
Nationwide said raising a deposit was a “major hurdle” for potential buyers due to rising house prices outpacing earnings growth.
The mutual pointed to the end of 2022 when the house prices rose by 19 per cent, but incomes increased by around nine per cent.
First-time buyers house price to earnings ratio was 5.6 at the end of last year, the same as the year prior.
Nationwide said that to raise a 20 per cent deposit for a typical first-time buyer home was equivalent to 112 per cent of pre-tax income, below all-time high of 117 per cent earlier in 2022.
The mutual said UK households had saved £200bn more in bank deposits during the pandemic but this was mostly from older, wealthier households so did not help as many first-time buyers.
It noted that many first-time buyers continued to rely on help from friends and family or inheritance to raise the deposit.
Nationwide said in 2021/2022 around a third of first-time buyers needed help raising a deposit, which is up from 27 per cent in the mid-1990s
Affordability will ‘remain challenging in the near term’
Harvey said that there was “some scope for affordability to improve a little in the year ahead”, pointing to longer-term interest rates falling back towards pre-mini Budget levels.
“If sustained, this should feed through to mortgage rates and improve the affordability position for potential buyers, albeit modestly, as will solid rates of income growth – wage growth is currently running at seven per cent in the private sector – especially if combined with weak or negative house price growth,” he explained.
Harvey said the “overall affordability situation looks set to remain challenging in the near term” and saving a deposit would be a “struggle for many”.
He said the cost of living would outpace earning growth again this year, and labour market conditions were expected to weaken.
He also noted that rents had been “rising at their strongest pace on record” and would be a further drag for renters who may be looking to buy. This is especially the case as rents tend to a higher proportion of income than a mortgage.
Harvey added that the closure of the Help to Buy scheme would also have an income, but said the mortgage guarantee scheme could be helpful as it had been extended into 2023.
Affordability pressures have worsened in all regions
Nationwide said affordability has worsened in all regions, with the cost of servicing a mortgage as a share of take-home pay is above or at long-run average in all regions.
It added that affordability pressures “remain particularly acute” in London and South of England. Scotland and the north are the most affordable but are at their highest level for a decade.
London’s house price to earnings ratio stands at 9.2, the highest of any region. Scotland and North region has the lowest at 3.4.
Westminster in London is the least affordable local authority with house price earnings ratio is 15.6. Oxford and Hertsmere in Hertfordshire come second at 10.4 and South Hams in Devon comes third at 9.8.
Inverclyde in Scotland is the most affordable local authority with house price earnings ratio of 2.6. This was followed by Burnley in North West England and Country Durham at 3.1 and Blaenau Gwent in Wales at 3.8.
Tewkesbury in the South West and Three Rivers in the Outer Metropolitan Region showed the biggest improvement with house price to earnings ratio falling by 0.9 respectively. Brent in London and Melton in Leicestershire both improved by 0.8 points.
