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Interest rates: First-time buyers face paying 40% of salary in mortgage payments

Interest rates A row of houses in Elgin Crescent, in Notting Hill, London, where a terraced house is currently for sale for over �12 million. The borough of Kensington and Chelsea is one of the most polarised in Great Britain, with some of the most expensive real estate in the UK just a short walk from several of the most deprived wards in the country - including the area around the Grenfell Tower. Picture date: Wednesday July 12th, 2017. Photo credit should read: Matt Crossick/ EMPICS Entertainment.
Interest rates: A 10% deposit on an average first-time buyer type home is now £22,494. Photo: Matt Crossick/ EMPICS Entertainment (Empics Entertainment)

The average monthly mortgage payments for new first-time buyers could increase to an average of 40% of their gross salary as the Bank of England increases the interest rate by 0.5%.

Rightmove (RMV.L) said that the average mortgage payment would rise from £976 to £1,030.

Average first-time buyer monthly mortgage payments are currently 38% of an average gross salary – a 0.5% rise would take it to 40%, which is a level not seen since 2012.

Read more: Bank of England announces biggest interest rate hike in 27 years

A 10% deposit on an average first-time buyer type home is now £22,494, which is 57% higher than 10 years ago, when it stood at £14,316.

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Within the same time frame, the average gross monthly salary has increased by 31%.

If the rate rose today by 0.25% – the average monthly mortgage payment for new first-time buyers would increase to £1,003 nationally.

UK interest rates
UK interest rates

Tim Bannister, from Rightmove, said: “First-time buyers trying to get onto the ladder are currently facing average monthly mortgage payments that are 20% higher than the start of the year due to rising interest rates and asking prices, and that’s assuming they’ve been able to overcome the hurdles to raise a large enough deposit.

“With each jump in interest rates, homeowners are contributing approximately 1% extra of their gross salary on average towards a mortgage.

“Average mortgage rates for a two-year fix are just over 3% per cent compared to nearly 6% 10 years ago, so they are still historically low. However, as they creep upwards, the large number of first-time buyers looking to move this year may look for some financial certainty by locking in longer mortgage terms.

Read more: How Bank of England’s interest rate rise will affect mortgages and house prices

“Demand for first-time buyer type homes is up 35% compared to the last ‘normal’ market of 2019, which shows a high motivation to move from first-time buyers despite the challenges.”

Despite the affordability challenges, demand for first-time buyer type properties is up 35% compared with 2019.

The Bank of England has made it clear that it will act forcefully to rein in record high inflation and markets are all but certain that a rare half-percentage point interest rate rise will be delivered this Thursday.

Watch: Will UK house prices ever fall?