Interest rate hikes mean first-time buyers need to earn £12k more

The average first-time buyer will need an additional £12,250 of income to buy a home compared to a year ago and an additional £35,000 in London as mortgage rates are set to surge.

Mortgage rates are expected to hit 4% as inflation and interest rates continue to climb, plunging UK households into a cost of living crisis.

Those in the south east of England will need at least an additional £15,750 salary where house prices are higher, according to Zoopla’s House Price Index. However, in lower value regional markets such as the North East, the increase will be less than £5,000.

“The housing market has been resilient to the rising cost of living so far. The new energy price cap will add to the pressure facing households especially those on lower incomes,” Richard Donnell, director of research at Zoopla, said.

Read more: Celebrity homes: 6 luxury pads with famous former owners

“We see the recent jump in mortgage rates having a greater impact on housing market activity and prices moving ahead. First-time buyers on lower incomes, those looking to trade-up using a bigger mortgage and buyers in the south east of England will all feel the greatest impact on affordability,” he added.

Until recently, the repayments for a mortgage were lower than renting in all regions (2% mortgage rate) outside of the capital. In London and regions in the South of England, the mortgage rates increasing to 4% would push the income to buy to be on a par with, or above the average rent. This shift is likely to affect demand from those seeking to get onto the property ladder primarily in southern England.

Whilst those buying homes with a mortgage may be on higher incomes, the jump in mortgage rates for new buyers will compound cost of living increases and impact house sales from autumn into 2023, Zoopla warned.

“We expect a growing number of households to continue to re-evaluate their homes as a result of ongoing pandemic factors and with further impetus from the rising cost of living. This will support overall sales numbers but the rate of price inflation will continue to slow,” Donnell said.

As more people are priced out of the market – especially in the areas where the house prices are highest – there is less demand from first time buyers which will hinder house price growth.

Zoopla said some outpriced first-time buyers will look to buy smaller, lower value homes as rising interest rates impact affordability. They may also consider moving further afield as post pandemic circumstances allow many to continue hybrid working.

Still, house prices continue to grow with the average home having increased by 8.3% or £19,800 in the past 12 months.

Read more: First-time buyers struggling to buy coastal homes as house prices outstrip pay

The South West and Wales are jointly the best performing regions, with annual house price growth of 10.6%.

The highest level of buyer interest in the UK can be found in the West Midlands (+35%) and the North East (+29%) with the market in London weakest, coming in at 6%.

First-time buyers are now the largest buyer group accounting for up to 35% of sales this year to date and are driving the market.

“The economic climate does suggest challenging times ahead. With interest rates rising and forecast to continue this upward trajectory, coupled with significant cost of living rises and supply chain issues which persist, there is reason to be cautious,” Jayne Twiddle, national operations director at Hunters, said.

Watch: Will UK house prices ever fall?