"Over the next year or so we expect several further small interest rate rises, with mortgage rates set to peak around the middle of 2023 which will add to the cost of buying in cash terms."
The average rent in Great Britain rose to £1,152 in May, 11.5% or £119 pcm higher than the same month last year. This marked the first time that rental growth hit double digits since the Hamptons Lettings Index began in 2012 with growth surpassing the previous record rate set last month (April) of 9.8%.
With rents rising quickly and mortgage rates near historic lows, for the last 11 months it has been cheaper to buy a home in Great Britain than rent. In May, it was £40 per month cheaper to service a mortgage with a 10% deposit than it was to rent the same home, while in November 2021 it was £160 cheaper to buy than rent.
However, if last week's 0.25% base rate rise is fully passed on to mortgage rates it will reverse this trend and make renting a home £1 per month cheaper than buying on a monthly basis. For someone with a 10% deposit, the rate rise will add a further £41 to their average monthly mortgage repayment, taking it from £1,112 to £1,153.
This is a marked reversal to pandemic times (mid-2020 to mid-2021) when lenders raised mortgage rates for buyers with 5% or 10% deposits meaning it was considerably cheaper to rent than buy. During this period, the Bank of England base rate remained at an all-time low, but lenders hiked their rates to reduce risk. These higher mortgage costs meant that for the first time since 2014, renting was cheaper by £65 per month than buying with a 10% deposit.
Any future increase to the base rate of a similar scale will likely add a comparable amount to mortgage repayments. Each 0.25% rise in the base rate will push the cost of buying further above the cost of renting by £41 a month for a typical first-time buyer with a 10% deposit. Despite rents rising by 11.5%, they would need to rise by 12.5% just to keep pace with the rising cost of buying.
Meanwhile for buyers with a 5% deposit, it has nearly always been cheaper to rent than buy since the monthly mortgage costs are higher. However, yesterday’s base rate rise means it will be £105 per month more to buy than rent, up from £59 in May 2022.
There are also regional variations to factor in. For someone with a 10% deposit, it is typically cheaper to rent rather than buy further South, while further North it is generally cheaper to buy than rent. Across the whole of Great Britain in May it was £40 per month cheaper to buy than rent, but in the South East (by £1pcm), South West (by £2pcm), East of England (by £64pcm) and East Midlands (by £44pcm) it is cheaper to rent than buy. Back in January 2022, it was cheaper to buy than rent in every region of the country.
Aneisha Beveridge, head of research at Hamptons, said: “Rising interest rates are set to swing the scales for would-be first-time buyers. For the last 11 months it’s been cheaper to buy with a 10% deposit than rent due to rental growth running hot and mortgage rates near record lows. But last week’s Bank of England base rate hike will change this once again, pushing the cost of buying back above renting – a reversal of pre-pandemic times when the average buyer saved nearly £800 a year by owning rather than renting.
“For many buyers though, it isn’t just the challenge of servicing higher monthly mortgage repayments, it’s saving up for a deposit which remains the big barrier.
“Over the next year or so we expect several further small interest rate rises, with mortgage rates set to peak around the middle of 2023 which will add to the cost of buying in cash terms. We also expect rental growth to slow later in the year as rising living costs squeeze affordability. By this point it will mean that for new buyers with smaller deposits, the monthly cost of purchasing a home will be significantly higher than renting one.”
