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Rate rises leave renting cheaper than buying

Many people would rather not rent, but must do so because setting aside sufficient money for a deposit is a struggle. But thousands of others – who have enough savings to buy a home of their own - prefer the tenant lifestyle. The members of this group stand to benefit from the rising interest rates which are set to make renting a home cheaper than buying one.

At the beginning of this year, it was cheaper to buy than rent in every region of the UK. But this is changing, as our new analysis shows.

Between July 2021 and June 2022, it was less expensive to buy a home if you had a 10% deposit. This was the result of record low mortgage rates and steep increases in rents. In November 2021, the difference in the monthly cost was £160, although by May this had reduced to £40.

On the assumption that the latest Bank of England base rate move from 1% to 1.25% is passed on in full to borrowers, buying a home will cost £41-a-month more for a buyer with a 10% deposit. This comes despite average annual rental growth reaching a record high of 11.5%. The monthly payment for a borrower with a 10% deposit will rise from £1,112 to £1,153.

For someone with a 5% deposit, it has almost always been cheaper to rent than buy because the cost of mortgage deals for such a borrower is higher. Between the start of 2020 and the onset of the pandemic, banks and building societies raised the rates on such deals to reflect the extra risk of this type of lending.

But the base rate rise will make buying as much as £105-a-month more expensive, against £59 in May.

Until now, there has been a North-South divide in the renting v buying debate. In the North, a borrower with a 10% deposit would have found it cheaper to buy than to rent; in the South and Midlands the reverse was true. In the East of England, the cost diff erence was £64-a-month, in the East Midlands, it was £44-a-month.

It is forecast that the Bank of England will further increase the base rate, with some economists expecting the rate to peak at 1.75% and others saying that it must rise to 3% to limit inflation. Every move of 25 basis points will add around £41 to the monthly mortgage bill of a borrower with a 10% deposit, increasing the differential between the cost of renting and buying.

We expect a series of small base rate rises, with mortgage rates set to peak in the middle of 2023. Would-be homebuyers with smaller deposits will find that the monthly cost of buying will be significantly higher than that of renting.

However, we also expect that rental growth will slow later this year, under pressure from the cost of living squeeze.

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Market Insight Summer 2022

Market Insight Summer 2022
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