Typical five-year fixed rate mortgages rose from around 1.3% in 2021 to 2.9% in mid-2022, according to Nationwide Building Society.

However, rates surged dramatically after the disastrous mini Budget in late September, hitting their highest levels since 2010 and taking them to 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”.

Its affordability report revealed that first-time buyer mortgage payments, based on 80% loan to value (LTV) mortgage, were 39% of take-home net pay. The mutual added this was close to levels seen in the lead-up to the 2008 financial crisis.

Deposit remains a ‘major hurdle’

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 house prices rose 19%, while incomes increased by less than half the amount at 9%.

For first-time buyers, the house price to earnings ratio was 5.6 at the end of last year, the same as the year prior.

Nationwide said to raise a 20% deposit for a typical first-time buyer home was the equivalent to 112% of pre-tax income, just below the all-time high of 117% 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 it did not help as many first-time buyers.

It noted that many first-time buyers continued to rely on help from family or an inheritance to raise a deposit.

Nationwide said in 2021/22 around a third of first-time buyers needed help raising a deposit, which is up from 27% in the mid-1990s.

Affordability will ‘remain challenging in the near term’

Harvey said 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 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.

The cost of living would also outpace earnings 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 impact, but said the mortgage guarantee scheme could be helpful as it had been extended into 2023.