House prices could plunge as rising interest rates look set to wipe 28% off the amount mortgage companies are willing to lend buyers.

The raft of tax cuts unveiled by the government on Friday last week has prompted concerns over inflation, with organisations from the Bank of England to the International Monetary Fund sounding the alarm over the falling value of the pound.

On Wednesday, the Bank of England announced an emergency buyback of government debt in a bid to ward off "a material risk to UK financial stability".

Sudbury Mercury: How the Bank of England base rate has changed since 2007. Analysts predict they could hit 6% next year.How the Bank of England base rate has changed since 2007. Analysts predict they could hit 6% next year. (Image: PA Graphics/Press Association Images)

It came after markets saw previous comments from the bank as a signal the cost of borrowing will have to go up to protect the pound and keep a lid on inflation.

Some analysts predicted the base rate – which currently stands at 2.25% – will have to rise to as high as 6% next year, causing mortgage rates to rise.

According to research by Zoopla, even mortgage rates rising from 2% to 5% could mean that borrowers are only offered a 28% smaller loan for the same monthly repayments.

Richard Norrington, chief executive of Suffolk Building Society, said this would have a "dampening" effect on property prices.

"There are a number of moving factors at the moment," he said. "We've not got enough supply of houses in this country and we've traditionally had a lot of demand so that's kept prices high.

"We're starting from a very strong position, but you can only expect [the fact mortgages are getting less affordable] to have a dampening effect on house prices – how dampening is the million dollar question.

"A lot of this will be in the court of the chancellor and the prime minister to see how they can stabilise the position that they frankly kicked off last Friday.

"If that can be stabilised relatively quickly then things will be closer to normal – albeit we have the cost of living crisis so mortgages will be a bit more expensive whatever happens because interest rates are going up.

"If they can't control the economy in that way, and therefore there's a real loss of confidence in the government, then we could be into a different place."

Peter Ogilvie, head of residential sales at Savills in Suffolk, said: "Successive interest rate rises, a challenging economic backdrop and the sad events in Ukraine have led to a more cautious outlook among buyers – and there are certainly signs the increase in cost of living is having an effect in terms of levels of activity.

"However, there are still not enough properties on the market in Suffolk to meet demand – and I think that will continue to underpin the majority of local house prices as we head into the autumn and early next year.

“Our own research gives a sense of just how the economic backdrop is impacting sentiment. In a recent survey of 1,000 prospective buyers across the UK, almost a third – 29 per cent – said they were having to reduce their budgets, particularly if they were reliant on borrowing. Downsizers and those looking to relocate were least affected.

“In the immediate future, our researchers expect a lot of potential buyers – particularly those reliant on high loan to value borrowing - to sit on their hands, especially given the general levels of uncertainty in the mortgage markets.

"Looking a bit further out, some will press on with a reduced budget but others will step out of the market until rates return to a more accessible level. As a consequence it’s likely we could see a period of lower transaction levels, much as we have experienced during other periods of uncertainty.

“First-time buyers and buy-to-let landlords, who are most reliant on mortgage debt, are likely to be the most affected. Across the rest of the market, more affluent buyers with lower debt requirements will be better able to ride things out."

Richard Donnell, executive director at Zoopla, said: “A surge in home values over the pandemic and the rise of mortgage rates means we face a sizeable hit to household buying power over the rest of 2022 and into 2023.

“While the recent changes to stamp duty are welcome, supporting activity in regional markets and the first-time buyer market in southern England, the increase in mortgage rates will erode much of the gains.”