For years, buyers have enjoyed mortgage repayments that are historically low, despite house prices which have risen considerably. Looking forward however, it’s likely over the short to medium term there will be a degree of equalisation between the costs faced by tenants and owner-occupiers, even among those who have been homeowners for a while and have built up a little bit of equity.
But for new buyers in particular, soaring mortgage rates have quickly changed the arithmetic on whether it’s cheaper to buy or to carry on renting, for the short term at least. For a typical first-time buyer with a 10% deposit and 25-year mortgage term, it is now considerably more expensive to buy than it is to rent the same home, by an average of £522 per month, the largest figure for at least a decade.
But of course some of the mortgage repayment goes towards paying down debt, although in the first few years of the term, the vast majority of the payment goes towards servicing the interest. Despite this, October was the first time in at least a decade that the monthly rent was cheaper than the mortgage interest alone, by £185 on the average home.
Those would-be buyers looking to reduce their monthly costs, now face putting together a much larger deposit. For someone with a 10% deposit, the cost of renting and buying was still broadly equal in June, before mortgage rate spiked. Today to keep the two costs equal, someone would need to put down a 37% deposit. The figure is even higher across London and the South East where yields are lower and mortgage (re)payments eat up a larger proportion of landlord’s returns.
All this means that would-be first time buyers with limited deposits are likely to find themselves better off financially continuing to rent than they are buying, for the short term at least. They’re able to bide their time, and wait to see where interest rates top out before making the plunge, a luxury which someone who bought for the first time two or five years ago doesn’t have when they come to remortgage.
Longer term however, it’s likely that mortgage rates dropping back coupled with rising rents are likely to push the cost of buying back under the cost of renting. Even if mortgage rates do remain elevated, buyers are able to lock in their housing costs long term. So if and when interest rates do go up again, increases are based on the mortgage amount when they bought their home, a figure which in the past has been eroded by house price growth and inflation.
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