A 20% deposit for an average UK home has jumped to a record 110% of average earnings over the last year, making “raising a deposit a significant challenge for prospective first-time buyers”, says the Nationwide Building Society.

This figure rises from 102% of the pre-tax income of a typical full-time employee 12 months ago, says the mutual’s November House Price Index Affordability report.

The study also pointed out that FTB house-price-to-earnings ratio stood at a record 5.5 in the third quarter of this year, above the previous high of 5.4 in 2007, and well above the long-run average of 3.8.

London continues to have the highest house price to earnings ratio at 9.0, below its record high of 10.2 in 2016.

Scotland continues to have the lowest house price to earnings ratio in the country at 3.4, followed by the North region at 3.5.

Nationwide senior economist Andrew Harvey, says: “One of the consequences of high house prices relative to earnings is that it makes raising a deposit a significant challenge for prospective first-time buyers.”

He adds: “House prices have continued to rise more quickly than earnings in recent quarters, which means affordability is becoming more stretched.

“Due to the historically low level of interest rates, the comparative cost of servicing a typical mortgage is still well below the levels recorded in the run-up to the financial crisis. However, even on this measure, affordability is becoming more challenging.

“The cost of servicing a typical mortgage as a share of take-home pay is now above its long-run average in the majority of UK regions. By contrast, pre-pandemic, this was only the case in one region – London.”

Markets continue to speculate that the Bank of England’s Monetary Policy Committee will raise interest rates early next year.

Harvey says: “Clearly, much will depend on the committee’s assessment of the outlook for growth and inflation, but investors expect Bank rate to be increased from its current record low of 0.1% around the turn of the year – most likely to 0.25% or 0.5% – and perhaps reaching 1% within 12 months.”

He adds: “Despite the sharp rise in swap rates in recent months, mortgage rates have remained close to all-time lows. But this may not persist and, if rates for new mortgages were to rise, this would exert further pressure on affordability for prospective FTBs.”

The building society says a 0.4% increase in rates would increase initial mortgage payments by £34 a month for a FTB, assuming an 80% loan-to-value mortgage over a 25-year term.

Harvey adds: “This represents a modest rise in mortgage payments relative to take-home pay from the current level of 31% to 32%. A 0.9% increase in rates would increase initial mortgage payments by £79 a month [from current levels], representing 34% of take-home pay.

“Provided the economic recovery remains resilient, higher interest rates are likely to exert a moderating influence on the housing market, as well as dampening price pressures across the economy more generally.”

Mortgage lender Ahauz co-founder Karthik Srivats adds: “With affordability stretched like never before, first-time buyers will seek a record high of £10bn in support this year from their parents and friends in an effort to scrape together a deposit.

“The hot market means the gap between house prices and earnings has never been greater, and things are only going to get far tougher when the government’s Help to Buy scheme ends in 2023.

“The need for more innovative finance measures has never been more pressing.”