Higher mortgage rates have led to a sharp rise in the cost of servicing a mortgage relative to take-home pay, according to Nationwide.

The building society said that first-time buyer mortgage payments now total 39% of take-home pay (based on an 80% loan-to-value mortgage, at prevailing mortgage rates). This is well above the long-term average and close to the affordability squeeze seen in the run up to the credit crunch.

Andrew Harvey, senior economist at Nationwide, said: “The biggest change in terms of housing affordability for potential buyers over the past year has been the rise in the cost of servicing the typical mortgage as a result of the increase in mortgage rates.

“This trend began in earnest towards the end of 2021, with typical five-year fixed rates rising from 1.3% in late 2021 to 2.9% by mid-2022, as market interest rates that underpin mortgage pricing rose steadily, reflecting expectations that the Bank of England would have to raise rates significantly in the years ahead to help bring surging inflation back to its target rate of 2%.

“But mortgage rates surged after the mini-Budget in late September, reaching their highest levels since 2010, over four times higher than the lows prevailing in 2021.”

House prices remain high

In a double whammy for first-time buyers as, not only are mortgages less affordable, but house prices remain high. This means it’s still tough to save a deposit to buy your first home.

Between the start of the pandemic and the end of 2022, house prices increased by 19%, while incomes rose by just 9%. At the end of 2022, the UK first-time buyer house-price-to-earnings ratio stood at 5.6.

Overall, affordability is unsurprisingly most stretched in London and south of England, while the North and Scotland remain the most affordable regions.

Affordability set to improve

There is some good news for first-time buyers.

Nationwide said it’s possible that affordability pressures could ease, as some mortgage rates reduce this year.

Harvey explained: “There is some scope for affordability to improve a little in the year ahead. Longer-term interest rates, which underpin mortgage pricing, have fallen back towards the levels prevailing before the mini-Budget.

“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 c.7% in the private sector), especially if combined with weak or negative house price growth.”