First-time buyer crisis as 40pc of salary needed to pay mortgage

Months of rising rates are punishing young borrowers purchasing their first home

First-time buyers are facing an affordability crisis not seen since the financial crash with new homeowners forced to spend almost 40pc of their salary on mortgage payments.

Months of interest rate rises have resulted in higher mortgage costs for borrowers purchasing their first home. The average first-time buyer spent 39pc of their net take-home pay on mortgage payments in the final quarter of 2022, according to analysis by lender Nationwide.

The last time this share was higher was during the financial crisis in 2007, when the share rose to 46pc. The last time the share jumped above 40pc was in 2006, in the run up to the crash.

Andrew Harvey, of Nationwide, said: “This measure is now well above the long run average, and close to the levels seen in the run up to the financial crisis. It is very difficult for prospective buyers at the moment.

“While wider financial market conditions stabilised by the end of 2022, with market interest rates falling back towards the levels prevailing before the mini-Budget, mortgage rates are taking longer to normalise.”

The average two-year fixed-rate mortgage for a borrower with a 5pc deposit has more than doubled in the past year, rising from 3.06pc in January 2022 to 6.13pc at the beginning of this month. For a homeowner taking out a £200,000 loan, the jump is equal to an additional £513 in interest each month.

The typical two-year fix for a borrower with a 10pc deposit climbed from 2.55pc to 5.89pc in the same period, according to analyst Moneyfacts.

This week the City watchdog, the Financial Conduct Authority, warned more than 750,000 households were at risk of defaulting on their mortgages in the next two years because of higher interest rates.

The regulator warned younger buyers were particularly vulnerable to rising monthly payments swallowing an unsustainably large share of their income.

First-time buyers must also contend with the mammoth task of raising a deposit after years of house price growth. A 20pc deposit on a typical first-time buyer home was equivalent to 112pc of a typical full-time employee’s gross income at the end of last year, according to Nationwide.

Rates on fixed-rate deals have been declining slowly and steadily since Chancellor Jeremy Hunt scrapped the majority of the mini-Budget last year and analysts are unanimous that mortgage rates have peaked. But buyers are still being forced to lower their expectations in the housing market.

Rowan Frayling, of mortgage broker J Finance, said first-time buyers had been forced to significantly reduce their budgets. Mr Frayling said: “One first-time buyer client was buying at £375,000 in May last year until the transaction fell through and is now only able to look at properties with a maximum of £335,000.

“Their mortgage payments are still £100 more a month with the same percentage deposit for a smaller mortgage. This is the new reality we are in.”

House prices have been falling on a monthly basis since October, but a significant drop is in the pipeline as a result of higher borrowing costs and dampened buyer demand. An 8pc fall has been forecast by analyst Pantheon Macroeconomics, the Centre for Economics and Business Research think tank and lender Halifax.

Mr Harvey added: “The overall affordability situation looks set to remain challenging in the near term and saving for a deposit will still be a struggle for many.

“The cost of living is set to outpace earnings growth by a significant margin again this year, while labour market conditions are widely expected to weaken.”

It comes as Persimmon, one of the largest homebuilders in the UK, warned monthly mortgage repayments for first-time buyers had doubled over the last year.

The housebuilder said prospective buyers had been driven away by higher mortgage costs, coupled with the withdrawal of the Help to Buy scheme.

The withdrawal of the Help to Buy scheme in England has dented demand from first-time buyers. The scheme allowed first-time buyers to borrow 20pc, or 40pc in London, of the value of a property from the government, interest-free for five years, but came to an end in October.