New analysis from Hamptons shows that low-deposit mortgage guarantee schemes are struggling to help renters become homeowners when interest rates are high.
Would-be buyers with a 5% deposit face paying £300 per month more in mortgage repayments than if they continued renting, according to newly released market analysis from Hamptons.
For years, when interest rates were at lower levels, most would-be owners with a 10% or 5% deposit found mortgage payments comparable to, or less than, their current rent (chart 1). This enabled new homeowners to build up equity at no additional monthly cost.
However, as of last month, prospective buyers in Great Britain with a 5% deposit faced mortgage repayments averaging £300 more per month than renting the same home.
This comes despite the rising cost of renting, with annual rental growth averaging around 7% across Great Britain each month this year. While buying allows the owner to build up equity, particularly when prices are rising, most tenants would struggle to find the additional £300 per month and pass a stress test at today’s rates.
Higher mortgage rates
Higher mortgage rates mean buying with a 5% deposit doesn’t currently make financial sense south of Birmingham. Across Scotland and the three northern regions of England (North West, North East and Yorkshire & Humber) the monthly cost difference between renting and buying with a 5% deposit is below £100 per month (chart 2). In the Midlands, there’s a higher difference of £117 to £122 per month.
Further south, where affordability is most stretched, most renters would find themselves significantly worse off each month by purchasing a home. In the South West, an average first-time buyer with a 5% deposit pays £341 per month more to buy a similar home. Meanwhile, in London, servicing a mortgage would cost the average tenant an extra £775 per month, which equates to £9,300 a year.
That said, the gap between renting and buying has narrowed since mortgage rates peaked last year. Back in November 2022, the average tenant in Great Britain would pay £547 per month to buy their rental home with a 5% deposit, £247 a month more than the extra £300 per month needed to buy last month.
While the gap has been closing, current mortgage rates remain a barrier for most buyers with a small deposit, particularly given that they will be stress-tested at even higher rates. Furthermore, negligible house price growth has slowed the rate at which homeowners can build equity to fund their next move.
According to Bank of England data, the average mortgage rate offered to a would-be buyer with a 5% deposit currently stands at 6.1%. Nationally, this rate would have to fall to around 4.2% to make the monthly cost of renting and buying with a 5% deposit similar.
Across the south of the country, the falls would need to be even larger. In London, it would take a rate of 3.6% to equalise the cost of renting and buying on a monthly basis.
The high cost of buying relative to renting is reflected in statistics from the current mortgage guarantee scheme (introduced in 2021) where the government essentially guarantees potential lender losses in a bid to boost 95% LTV (loan-to-value) lending.
High interest rates meant that mortgage guarantees in 2023 ran at just 35% of the 2022 average, with completions currently around 15% of the level that Help to Buy achieved.
Rental growth
Rental growth seems to be stabilising. The cost of a newly let home in Great Britain rose to an average of £1,337 pcm in May 2024, 6.3% or £79 pcm more than the same time last year. This marked the third month in a row where year-on-year increases averaged around 6%.
Meanwhile, rental growth for tenants renewing their contracts continued to rise, with average renewal rents up 8.8% year-on-year in May from 8.3% in April.
The slowing of national rental growth for newly let homes has been primarily led by London, where the pace of annual growth fell to 3.9% in May 2024, the lowest rate since November 2021.
London
Inner London was once again the only area to see rents fall on an annual basis (-2.3%), for the second month in a row. The average tenant here agreed to rent a new home for £3,003 pcm in May, the lowest level for 14 months and £171 pcm cheaper than in November 2023 when rents in Inner London peaked.
There were 20% fewer new tenants looking to rent a home in Inner London compared to the same month last year, the largest annual fall in any region.
Smaller homes are seeing bigger rent rises than larger homes. This reflects affordability challenges that are pushing tenants in search of more affordable homes. May 2024 marked the first time in 11 months when rents for newly let one-beds (7.6%) rose faster than two-beds (6.2%).
Aneisha Beveridge, Head of Research at Hamptons, comments: “Despite rental growth setting at around 6% year-on-year, renting remains more cost-effective than buying for most households across the country. 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.
“Both the Labour and Conservative Parties have included mortgage guarantee schemes in their manifestos to boost the availability of 95% loan-to-value deals.
"However, their effectiveness 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% 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. It was the Help to Buy Equity Loan which aided affordability in the most expensive markets, serving to top up deposits and significantly reduce mortgage repayments for the first five years.
“Persisting affordability pressures have driven competition for Britain’s more affordable rental homes. Smaller homes in traditionally cheaper parts of the country recorded the highest rental growth last month. With tenants squeezed from multiple angles, their ability to save for even a 5% deposit has been curtailed.”