Despite rents rising 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.
Renting versus buying
Would-be buyers in Great Britain with a 5% deposit face paying £300 per month more in mortgage repayments than if they continued renting. While buying allows the owner to build up equity, particularly when prices are rising, most tenants would struggle to find the additional £300 per month and pass a stress test at today’s rates.
That said, the gap between renting and buying has narrowed since mortgage rates peaked last year. Back in November 2022, the average tenant in Great Britain would pay £547 per month to buy their rental home with a 5% deposit, £247 a month more than the extra £300 per month needed to buy last month.
The role of interest rates
According to Bank of England data, the average mortgage rate offered to a would-be buyer with a 5% deposit currently stands at 6.1%. Nationally, this rate would have to fall to around 4.2% to make the monthly cost of renting and buying with a 5% deposit similar. Across the south of the country, the falls would need to be even larger.
Regional Disparities
Higher mortgage rates mean buying with a 5% deposit doesn’t currently make financial sense south of Birmingham. It’s in the South of England where affordability is most stretched, meaning most renters would find themselves significantly worse off each month by purchasing a home.
In London, the situation is particularly stark. The average tenant looking to buy will find themselves paying an extra £775 per month, a yearly sum of £9,300, to service a mortgage. Here, it would take a rate of 3.6% to equalise the cost of renting and buying on a monthly basis.
Conversely, in the northern regions of England and Scotland, the monthly cost difference between renting and buying is less pronounced, falling below £100 per month. This suggests a more accessible pathway to homeownership, provided that prospective buyers can meet the upfront deposit requirements.
The Impact of Government Support
Our analysis shows that low-deposit mortgage guarantee schemes struggle to help renters become homeowners when interest rates are high. Both the Labour and Conservative Parties have included mortgage guarantee schemes in their manifestos to boost the availability of 95% loan-to-value deals.
High interest rates have led to a marked decline in the uptake of the current mortgage guarantee scheme, with the number of completions only reaching 15% of the levels seen with Help to Buy. The latest government figures, which run to the end of 2023, show that the scheme has guaranteed three times more mortgages in the North West than in London.
This is why Threadneedle Street will probably determine the effectiveness of any future mortgage guarantee scheme 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.
This analysis also suggests that in a world of high interest rates, the take up of the Conservative's 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 which aided affordability in the most expensive markets, serving to top up deposits and significantly reduce mortgage repayments for the first five years.
Rental Growth Stabilises
The cost of renting a newly let home in Great Britain rose to an average of £1,337 per calendar month in May, a 6.3% increase from the previous year. This growth indicates a stabilisation in the rental market, marking the third month in a row where year-on-year increases averaged around 6%.
However, 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.
The slowing of national rental growth for newly let homes has been primarily led by London, where the pace of annual growth fell to 3.9% in May 2024, the lowest rate since November 2021. Inner London was once again the only area to see rents fall on an annual basis (-2.3%), for the second month in a row.
Persisting affordability pressures have driven competition for Britain’s more affordable rental homes. May 2024 marked the first time in 11 months when rents for newly let one-beds (7.6%) rose faster than two-beds (6.2%).
With tenants squeezed from multiple angles, their ability to save for even a 5% deposit has been curtailed. Despite the rising costs, renting continues to be a viable option for many. Learn more about the nuances of renting in our tenant guide.
