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First-time Buyer

‘Trouble ahead’ as rent set to be cheaper than paying mortgage

Paloma Kubiak
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Paloma Kubiak

Average monthly rent payments are expected to be cheaper than mortgage commitments later this year – the first time the balance has shifted in two decades.

The soaring house prices since the start of the pandemic coupled with rising borrower rates have pushed up average mortgage payments from £720 in Q4 2019 to £870 now (based on 80% LTV/20% mortgage deposit).

While this is still cheaper than the average monthly rent figure of £935, according to Capital Economics, it expects the average monthly mortgage to exceed the price of rent later this year for the first time since 2004.

The last time the balance was tipped in favour of renting, it preceded recessions, it noted.

It forecasts mortgage financing costs to rise further, from around 1.9% now to almost 3% next year (based on 80% LTV).

“When the monthly cost of buying has eclipsed that of renting, in the past it has signalled trouble ahead, with prospective first-time buyers choosing to rent rather than buy, helping to cool demand”, its UK housing market update noted.

It said some prospective first-time buyers may choose to rent for a bit longer, so as house price growth cools, demand for rental properties will be strengthened.

Further, the benefits to first-time buyers of getting on the housing ladder “will become less clear cut”.

But it said it’s easy to see why owning is perceived as more desirable than renting. Most of the time average mortgage repayments are less than average rents, and in real terms, house prices have risen 140% since 1980, “delivering a large capital gain to buyers”.

However, the long-term financial implications of buying rather than renting are much broader than the initial month-to-month consequences for households’ cash flow.

“Buying entails high up-front costs such as legal and mortgage valuation fees, a deposit, and stamp duty. On the other hand, with interest rates still low by historical standards a larger share of mortgage payments will go towards capital repayment rather than interest, meaning householders build up their wealth whereas rent is a pure cost,” the report stated.

As part of its analysis, it set out the cumulative costs and benefits of buying a house in 2018 and 2023 and selling it five years later. For comparison, it also showed the finances of a renter who invests their home deposit in a global equity tracker.

It said despite the upfront costs of buying and mortgage repayments rising above the cost of rent, homebuyers will still be better off than renters in five years’ time.

“Only if house prices were 3.5% lower than they are now when the buyer sells would renting be the better option. Nonetheless, with the financial benefits becoming less obvious, we are likely to see an increasing number of would-be buyers opting to rent for a bit longer, which is another good reason to expect buyer demand to ease this year, while rental demand remains strong,”  Andrew Wishart, senior economist at the firm said.