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Higher rates make renting cheaper than buying with 5% deposit

Higher rates make renting cheaper than buying with 5% deposit
Shekina Tuahene
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Shekina Tuahene

Buying a home with a 5% deposit is more expensive than renting due to current interest rates, analysis from an estate agent group revealed.

Low-deposit borrowers would be paying £300 more each month in housing costs, according to the Hamptons Monthly Lettings Index. For this reason, the mortgage guarantee scheme would not help some renters who want to become homeowners, Hamptons said. 

In its manifesto, the Labour Party said it would make the scheme permanent. 

Hamptons said when interest rates were lower, borrowers with a 5% or 10% deposit found that mortgage payments were less than or comparable to renting, which allowed new homeowners to build up their equity at no additional cost. 

Despite annual rental growth averaging around 7%, Hamptons said most tenants would find it difficult to afford the extra £300 per month and pass a stress test. 

The firm said average mortgage rates would need to fall from 6.1% to around 4.2% to balance out the monthly costs between renting and owning a home. 

Low-deposit borrowers worse off in the South 

Hamptons said buying with a 5% deposit did not “make financial sense South of Birmingham”. 

Its data found that in Scotland, the North West, North East and Yorkshire and the Humber, the difference between renting and buying with a 5% deposit was less than £100 per month. 

These were also the regions that had some of the highest use of the mortgage guarantee scheme, with three times more completions in the North West than in London. 

In the Midlands, this difference varied between £117 and £122. 

Where affordability is more stretched further South in England, Hamptons said renters would be “significantly worse off” each month by becoming a homeowner. 

A first-time buyer in the South West would be paying £341 more each month to buy a similar home to the one they were renting, while in London, this rose to an extra £775 each month. 

Hamptons said rising mortgage rates had seen the gap between renting and buying narrow over the last year, and raising a deposit was still the main barrier for most buyers. 

Help to Buy scheme a better solution for renters 

Aneisha Beveridge, head of research at Hamptons, said: “Despite rental growth setting at around 6% year-on-year, renting remains more cost-effective than buying for most households across the country. High mortgage rates have squeezed buyers with small deposits out of the market, forcing more households to rent for longer. The uplift in the monthly cost to buy a home with a small deposit has made purchases unviable in most places South of Birmingham. 

“Both the Labour and Conservative Parties have included mortgage guarantee schemes in their manifestos to boost the availability of 95% loan-to-value [LTV] deals. However, their effectiveness will probably be determined by Threadneedle Street rather than Downing Street. The extent to which the Bank of England reduces rates will shape the numbers of would-be buyers with small deposits more than the best designed Government policy.”

She added: “This analysis also suggests that in a world of high interest rates, the take-up of the Conservatives’ 0% capital gains tax incentive for landlords to sell to their tenant is likely to be fairly low, too. Rather, a Help to Buy style scheme is better suited to help renters with small deposits become homeowners, particularly when compared to the mortgage guarantee scheme. It was the Help to Buy Equity Loan [that] aided affordability in the most expensive markets, serving to top up deposits and significantly reduce mortgage repayments for the first five years.” 

“Persisting affordability pressures have driven competition for Britain’s more affordable rental homes. Smaller homes in traditionally cheaper parts of the country recorded the highest rental growth last month. With tenants squeezed from multiple angles, their ability to save for even a 5% deposit has been curtailed,” Beveridge said. 

Stabilising rental growth 

Hamptons found that rental growth seemed to be steadying, with the cost of a newly let home in Great Britain rising to an average of £1,337 in May. This was a growth of 6.3% or £79 more each month compared to a year ago.

This was also the third consecutive month in which annual increases averaged around 6%. 

Rental growth for tenants renewing their contracts continued to rise, with an average increase of 8.8% year-on-year in May, compared to 8.3% in April. 

London led the slowdown in national rental growth for newly let homes, falling to 3.9%. This was the lowest rate of growth since November 2021. 

Inner London was the only region to see an annual decline in average rents for the second month running, with a 2.3% drop. 

Meanwhile, rental growth for tenants renewing their contracts continued to rise, with average renewal rents up 8.8% year-on-year in May from 8.3% in April.