House prices will suffer if mortgage rates hit 6pc as home buyers will cut how much they can offer by tens of thousands of pounds, new research has shown.
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 property website Zoopla.
The Bank of England interest rate could hit 5.75pc next year, according to analysts, which will drive average mortgage rates to 6pc, up from 4.7pc today. This will drastically cut what buyers can offer, Zoopla 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, the share of 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 their home this year need to price realistically.”
London and the South East, where house 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 – namely Wales, where house prices have soared 27pc over the pandemic – are also particularly vulnerable.
Lenders have already withdrawn mortgage deals en masse after markets priced in a Bank Rate of 5.75pc next year – in response to Chancellor Kwasi Kwarteng’s “mini-Budget”. Analysts had previously expected a 4.5pc rate. Nationwide Building Society has relaunched fixed-rate deals in excess of 6pc for first-time buyers with small deposits.
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 market is now at a tipping point. House prices have continued to increase rapidly, but the reality for many buyers is that they are no longer able to stretch themselves financially.”
Sellers should be wary of overpricing their homes, he warned. “Entering the market with an over ambitious asking price will mean properties languish with little-to-no attention from prospective buyers,” he added.
Mr von Grundherr also warned that the rise in mortgage rates would far outweigh any savings buyers make from the Chancellor’s stamp duty cut announced last week. He said: “Don’t be fooled into thinking this marginal saving will spur them into paying way over the odds for a home. It won’t.”
Demand for homes in September was only 8pc higher than the five-year average. A year ago, demand was up 23pc.
Mr Donnell said this week’s rate expectations would take three to six months to feed through into the market as buyers are working off mortgage offers agreed several months earlier.