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Is buying a home now cheaper than renting?

  1. 12 July 2018
  2. By Andi Michael

With recent research revealing that monthly mortgage repayments on a first-time home are lower than monthly rents, we're asking: is it now cheaper to be a home owner?

To buy or to rent? It’s a decision that many people grapple with at a certain stage in their life, but which route is actually more cost-effective?

In the past, renting was seen as the cheaper alternative to buying a home – the best bet for people on a budget - but in the last few years there has been a role reversal. For those who can get on the property ladder – and there are obstacles in the way of that goal in the form of high house prices and the requirement for increasingly large deposits – being a homeowner is likely to work out cheaper than renting a property.

New research released by Santander Mortgages has further backed this up, with average monthly rental prices surpassing average monthly mortgage repayments on first-time homes in every UK region.

Lower costs for homeowners

For those able to purchase a property, the research found that they could save £2,268 a year more than if they were renting. While the monthly repayments for the average first-time buyer household is currently £723, the average monthly rent in the UK is currently £912 per household – a significant uplift given no assets are owned in the latter case.

The findings mean that homeowners could save an average of £189 a month or £2,268 a year compared to renters.

The assumption is often that homeowners will be under greater financial pressure than renters on a monthly basis – but the Santander research suggests otherwise. It’s true that homeowners also have to factor in the cost of maintenance, upkeep, possible home improvements and – if they own a leasehold home – ground rents and service charges, but renters can often have extra monthly or annual costs to factor in as well, and rents being higher than mortgage repayments gives them much less wriggle room if they are trying to save for a deposit as well.

Regional differences

While average monthly rental prices surpass average mortgage repayments on a first-time buyer home in every region of the UK, the savings are starker in certain locations. It is Londoners, in fact, who could make the biggest savings, with the average monthly rent in the capital £289 higher than monthly mortgage repayments on a typical first home. This works out as £3,468 a year, which means potential first-time buyers in London would benefit most (and make the biggest monthly savings) by switching from renting to property ownership.

Historically (and traditionally) renting was the cheaper option, especially in London and the South East, mostly down to the consistently high house prices in these locations. That trend has been reversing since 2010, though, when the economy was reset in the wake of the global financial crisis.

Interest rates have been kept at record lows and inflation has mostly been on a downward spiral, which has in turn brought mortgage rates down significantly. There has never been a better time to borrow or secure a mortgage, with numerous enticing mortgage deals on the market for all kinds of buyers.

While inflation and mortgage rates have been in decline, rents have steadily crept up in the last decade or so as demand has soared above supply.

First-time buyers in Northern Ireland would also be significantly better off, saving themselves £178 per month or £2,136 a year by buying instead of renting. In the North West and Scotland, too, first-time buyers would be better off buying to the tune of £152 a month (or £1,824 a year) and £134 a month (or £1,608 a year) respectively.

Those living in the East of England, by contrast, would only better off by £516 a year, with the typical first-time buyer’s monthly mortgage payments only £43 greater per month than average rents. In the East Midlands and the North East it’s a similar story, with not a huge deal of difference between average monthly repayments and average monthly rents. Even then, homeowners would still be better off by more than £500 thanks to buying rather than renting.

Alternative methods of saving

Of course, to be able to afford to buy a home in the first place is not easy in this day and age – where high house prices mean that most first-time buyers need to place down large deposits to secure a property. The average first-time buyer deposit currently stands at £51,905 (and significantly higher in London). With savings difficult to accrue thanks to low interest rates, hopeful buyers are increasingly opting for alternative methods of saving.

One in five (22%) of those surveyed said they would consider selling shares in the property, providing a potential capital return when the home is sold, while 38% would think about moving back in with their parents to save up a deposit more quickly. A further 21% said they would give up alcohol to raise the funds needed for a deposit.

There are also a number of government initiatives to encourage people to save towards their first home, including the Help to Buy and Lifetime ISAs – although there are mixed opinions on how successful these have been. There has also been a revival in recent times of 100% mortgages, albeit with caveats, with family deposit and guarantor mortgages on offer from the likes of Barclays and the Post Office.

Better to buy than rent

Prospective first-time buyers will, in all parts of the UK, be better off once they own a home. That, of course, is no easy feat – and in order to raise a deposit many will have to turn to the private rented sector, where rents are higher than monthly mortgage repayments on a first home. It’s a bit of a catch 22 situation, but for those who are in a position to buy it’s advantageous in the long-run, with potentially huge financial benefits further down the line.

Buying a home is a major financial investment with significant upfront costs to take into account – and certainly shouldn’t be a decision taken lightly – but the rewards can be considerable and, once a mortgage is paid off, you have a valuable asset in your possession.

By contrast, renting is currently more expensive than owning a first-time buyer home, but for some the flexibility and lack of responsibility that renting offers is highly desirable. By and large it will come down to personal preference, but there is no denying the figures – as far as first-time buyers are concerned, buying currently wins out over renting in terms of cost.

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