An increase in mortgage rates means renting has become cheaper than buying a home for the first time since 2010.
The typical monthly rent is now 9.5% or £122 cheaper than the mortgage repayments for the same rental property
Renting costs are increasing at a slower rate, compared to mortgages,
It’s still cheaper to buy than rent in regions with below-average house prices, like in the North of England and Scotland
In the South of England, first time buyers need a 31% or £42,000 deposit match to their mortgage repayments to their monthly rent
Paying rent is cheaper than repaying a mortgage for first-time buyers for the first time in 13 years.
For many first-time buyers, who account for 1 in 3 home sales, the difference in costs between renting and buying their first home is at the front of their mind.
Usually, within the first 3 years, 70% of first-time buyers will rent before purchasing a home. During this time, they’d expect to be paying more in rent than they would if they were to be paying off their mortgage. However, with the mortgage rates staying consistently high, the monthly costs of mortgage repayments are actually higher than the cost of rent on the same property.
Increasing mortgage rates mean that renting is a cheaper option
We’ve compared the average rent to the average monthly mortgage repayment for a first-time buyer. Our analysis presumes they’re buying the property they rent with a 15% deposit on a 30-year term with a mortgage rate of 5.6%.
If you’re a first-time buyer, your monthly rent will be £122 cheaper than the mortgage repayment on the same property.
Higher mortgage rates have increased a typical first-time buyers’ mortgage repayments by a third in the last 12 months.
Meanwhile, rents have risen by a lesser 10.4% over the same period, leading to buying to become more expensive than renting.
The chart shows the difference between the average rent and monthly mortgage repayment since 2010.
Over the last 13 years, Mortgage repayments were cheaper than rent
Since 2010, average mortgage repayments for first-time buyers were £210 cheaper per month than renting on average.
This meant that many better-off first-time buyers could afford to buy a larger 3 bedroom - and sometimes even 4 bedroom - house, without spending any more on housing each month.
Our data matches up with this, showing that half of first-time buyers wanted to purchase a three bedroom house in 2022.
This was the case up until the mini-budget fall-out last autumn, when the difference between mortgage repayments and rents shrank.
Buying is still cheaper than renting in the North of the UK
Although renting is now cheaper than buying in the UK on average, it still works out cheaper to buy in certain regions.
There’s a clear north-south divide, as regions with lower property values are cheaper to buy than rent in - by as much as 18% per month.
In the North East of England, a first-time buyer could expect to pay 18% (or £118) less on their mortgage each month than their rent.
And in Scotland, you’d pay 17% (or £128) less on your mortgage than rent.
It’s still marginally cheaper to buy an average-priced rented home than rent in the North West, Northern Ireland, Wales and Yorkshire and the Humber.
However, if mortgage rates increase to 6%, then renting is likely to become cheaper in these regions.
The table shows the cost of mortgage repayments versus monthly rent for first-time buyers using a 15% deposit, 30-year mortgage term and 5.6% mortgage rate.
Why has purchasing a home in the Midlands become so expensive?
The affordability of acquiring an average-priced rental property in the Midlands changed when mortgage rates surpassed 5% at the end of 2022.
Our research reveals that in order to close gap between mortgage and rental repayments, you’ll need a deposit of £9,000.
How can I make mortgage payments more economical than renting in the South of England?
Increase the size of your deposit:
While it's easier said than done, having a larger deposit when purchasing your first home typically reduces your monthly mortgage repayments. A higher deposit reduces the amount borrowed from the mortgage provider, leading to lower interest costs. It might also make you eligible for a more favourable interest rate due to a lower loan-to-value (LTV) ratio.
Understanding loan-to-value ratios:
Adding £5,000 to your deposit can decrease your LTV by 2%, resulting in a 2.2% reduction in your monthly mortgage payment (based on purchasing an average-priced rental property).
The advantages of a larger deposit are significant in regions where home buying has recently surpassed renting costs, such as the Midlands. However, in the South of England, you would need to substantially increase your deposit to align your monthly mortgage payments with your rent. Renting remains at least £160 more affordable than monthly mortgage payments in all southern regions, with this gap expanding to £490 in London. To match average London rent with mortgage payments, a deposit equivalent to 31% of the property value, or £164,000, would be necessary. In other southern regions, achieving parity between your mortgage payment and rent requires a 31% deposit, ranging from £66,000 in the South West to £83,000 in the South East.
How to save for a deposit:
A reduction in mortgage rates could alleviate the pressure on first-time buyers striving to accumulate more equity. If mortgage rates were to regress to 5%, reaching mortgage payments comparable to average rent would necessitate a 23% deposit in southern regions.
Other strategies to reduce monthly mortgage payments:
Collaborate with another buyer:
Pooling resources with another buyer, such as a partner, family member, or friend, can alleviate your mortgage expenses. By combining your savings, you can increase your initial deposit and help decrease your LTV, potentially granting you access to more favourable mortgage rates and lower overall interest expenses. However, it's essential to carefully consider whether this joint home purchase is right for your circumstances.
Re-evaluate your housing requirements:
If saving for a deposit poses a challenge, reconsider your priorities for your first home. You might contemplate opting for a smaller property, a terraced home, or a flat instead of a semi-detached or detached house. Expanding your property search to areas outside of cities could also reveal more affordable housing options.