Home buying power faces slump as ability to borrow is reduced

HOMEOWNERS and property buyers face a steep hit to the amount they can borrow as interest rates soar.

Those taking out a mortgage will see their borrowing power cut by a quarter if interest rates climb above 5pc next year as markets predict. The number of homes selling below asking price has already hit a three-year high as soaring mortgage costs force sellers to slash expectations, according to Zoopla.

Analysts say the Bank of England interest rate could hit 5.75pc next year, which will drive average mortgage rates to 6pc, up from 4.7pc today. This will drastically cut what homebuyers can offer, the property website warned.

Home loan sizes will fall by 35pc compared with when mortgage rates were 2pc. A typical buyer will only be able to borrow £125,775 compared with £193,500 – a drop of nearly £68,000. Even if average mortgage rates only reach 5pc, purchasers will see a 28pc hit to their borrowing power, reducing how much they can offer by £54,000.

Richard Donnell, of Zoopla, said: “The housing market can operate with mortgage rates at 4pc. When they go over 5pc, it’s the tipping point.”

Sellers have already cut prices in response to dwindling affordability. In the last three months, homes that sold 5pc or more below the asking price jumped to a three-year high of 5.8pc – a 45pc increase since the start of the year.

Mr Donnell added: “Homeowners that want to sell this year need to price realistically.” London and the South East, where prices are most out of kilter with wages and the market is therefore most dependent on borrowing, will be the worst hit, Zoopla warned.

The regions that recorded the highest house price growth during the pandemic are also particularly vulnerable.

Lenders have withdrawn mortgage deals en masse after markets priced in a Bank Rate of 5.75pc next year in response to the mini-budget. Marc von Grundherr, of Benham and Reeves estate agents, said buyers who could not source larger deposits would have to cut budgets, buy a smaller property, or purchase in a cheaper area.

He said: “The reality for many buyers is that they are no longer able to stretch themselves financially.”