For aspirational homeowners, renting isn’t their long-term plan. Typically, it’s saving up for a deposit that’s their biggest barrier to homeownership. But there are also thousands of people who rent out of choice, many of whom have the finances to afford their own home. In our latest analysis, we explore how market movements are changing the sums on whether it’s cheaper to rent or buy with a mortgage on a monthly basis.
For the last 11 months it’s been cheaper to buy a home with a 10% deposit than rent due to rental growth running hot and mortgage rates near record lows. 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, the latest Bank of England base rate increase is likely to swing the scales once again. Assuming the 0.25% base rate rise is fully passed on to mortgage rates, it will make renting a home £1 per month cheaper than buying on a monthly basis. And this comes despite rental growth hitting a record high of 11.5% across Great Britain in May. Rents would need to increase by 12.5% just to keep pace with the rising cost of buying and keep buying cheaper than renting.
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. 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 cost £105 per month more to buy than rent, up from £59 in May 2022.
This is a marked reversal of 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 reflect the higher risk to themselves. 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.
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 GB 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, however, it was cheaper to buy than rent in every region of the country.
What will happen if interest rates continue to rise? 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.
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.
