First-time buyers spending 40% of net pay on mortgage - Nationwide

The proportion of take-home pay that first-time buyers are having to put towards mortgage repayments is returning to levels last seen in the 2008 financial crisis, Nationwide has warned.

The lender’s latest affordability report found that based on an 80% loan-to-value mortgage at 5.5%, first-time buyers are currently spending close to 40% of their take-home pay on servicing a home loan.

That is above the long-run average of around 30% and is similar to the 45% levels seen in 2008.

It comes as Nationwide warned higher mortgage rates have resulted in a significant increase in the cost of servicing a mortgage relative to take-home pay.

The lender said high house prices relative to average earnings continue to make raising a deposit a significant barrier for first time buyers, with affordability most stretched in London and south of England.

The North of England and Scotland remain the most affordable regions.

Commenting on the figures, Andrew Harvey, senior economist, for 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, more than four times higher than the lows prevailing in 2021.

“While wider financial market conditions had 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.”

Harvey suggested there is some scope for affordability to improve a little in the year ahead.

He added:  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, especially if combined with weak or negative house price growth.

“Nevertheless, the overall affordability situation looks set to remain challenging in the near term.”

He said saving for a deposit will still be a struggle for many, especially as the cost of living is set to outpace earnings growth and rents are rising at their strongest pace on record.

Tom Bill, head of UK residential research at Knight Frank, said: “This is a confusing moment for anyone buying a property.

“Mortgage rates are three percentage points higher than they were this time last year but are also falling. 

“After 13 years of ultra-low borrowing costs, monthly outgoings will rise by hundreds of pounds at a time when cost-of-living pressures are already biting. However, rates are falling as the shock of the mini-Budget works its way through the system, though any decline will not take us back in time much beyond last September. The message in 2023 is stay close to your mortgage broker.
 
“The pandemic changed the affordability map of the UK to some extent as prices rose outside London more quickly but the re-balancing between the capital and the rest of the country still has some way to run. 

“Affordability constraints will become the single-biggest influence on house price growth over the next few years, with Greater London under-performing the rest of the country. We expect prices to grow more in the widening commuter belt around the capital as well as traditionally more affordable parts of the UK.”