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Renting remains cheaper than buying in UK as mortgage rates soar

Life is not much better for renters either, as competition for affordable places to live is also driving up rental prices.
Life is not much better for renters either, as competition for affordable places to live is also driving up rental prices.

Renting remains significantly more affordable than buying a home with a five per cent deposit in the UK, as lenders hike rates on home loans, according to the latest Hamptons Monthly Lettings Index.

Would-be homeowners with a five per cent deposit are currently paying an average of £300 more per month in mortgage repayments than they would if they continued renting, the data shows.

The financial burden is most pronounced in London, where buying a house costs an additional £775 per month, or £9,300 annually, compared to renting.

It comes as the average two- and five-year fixed mortgage rates rose between early May and early June to 5.93 per cent and 5.50 per cent respectively. The average two-year rate last exceeded six per cent on December 7.

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Aneisha Beveridge, head of research at Hamptons, said: “High mortgage rates have squeezed buyers with small deposits out of the market, forcing more households to rent for longer.

“The uplift in the monthly cost to buy a home with a small deposit has made purchases unviable in most places south of Birmingham,” she added.

Bank of England data shows the average mortgage rate for buyers with a five per cent deposit is currently 6.1 per cent. To equalise the cost of renting and buying, mortgage rates would need to drop to around 4.2 per cent.

It is a tough period for prospective buyers, who remain stuck in the rental market due to wage stagnation and economic turmoil affecting mortgage rates.

The Bank of England’s interest rate hikes have increased pressure on households, with the share of mortgages in arrears continuing its ascent, according to fresh data.

Life is not much better for renters either, as competition for affordable places to live is also driving up rental prices, especially for smaller properties. Annual rental growth averaged around seven per cent across the nation each month this year, Hamptons said.

In his party manifesto, Labour leader Keir Starmer vowed to work with local authorities to give first-time buyers priority on homes.

He also promised to “introduce a permanent, comprehensive mortgage guarantee scheme to support first-time buyers who struggle to save for a large deposit, with lower mortgage costs.”

The Conservatives have extended their mortgage guarantee scheme, aiming to help over 80,000 buyers in the next five years, and to increase the number of available 95 per cent loan-to-value deals.

But Beveridge said the effectiveness of these schemes “will probably be determined by Threadneedle Street rather than Downing Street.”

“The extent to which the Bank of England reduces rates will shape the numbers of would-be buyers with small deposits more than the best-designed government policy.

“This analysis also suggests that in a world of high interest rates, the take up of the Conservative’s 0 per cent capital gains tax incentive for landlords to sell to their tenant is likely to be fairly low, too.

“Rather, a Help to Buy style scheme is better suited to help renters with small deposits become homeowners, particularly when compared to the mortgage guarantee scheme,” she explained.