Potential house buyers putting down a 5% deposit find themselves spending an additional £300 monthly on mortgage repayments compared to renting, according to the latest Hamptons Monthly Lettings Index for May 2024. To align the monthly costs of renting and buying in Great Britain, the mortgage rate would need to drop from 6.1% to approximately 4.2%.

Elevated mortgage rates make purchasing with a 5% deposit financially unviable in most areas south of Birmingham. In London, covering a mortgage would cost the typical tenant an extra £775 per month, translating to £9,300 annually.

Currently, the number of completions supported by the existing mortgage guarantee scheme stands at merely 15% of the level reached by Help to Buy. Meanwhile, rental growth on newly let homes has stabilized around 6%, with the average rental cost in Great Britain rising 6.3% over the year to May 2024.

The analysis reveals that low-deposit mortgage guarantee schemes falter in assisting renters to transition into homeownership when interest rates soar. “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,” noted Hamptons. “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 reality persists despite rising rental costs, with annual rental growth averaging around 7% across Great Britain each month this year. While homeownership allows equity accumulation, most tenants would struggle to meet the additional £300 monthly and pass today’s stress tests.

The heightened mortgage rates render buying with a 5% deposit financially irrational south of Birmingham. In contrast, across Scotland and the northern regions of England (North West, North East, and Yorkshire & Humber), the monthly cost disparity between renting and buying with a 5% deposit is below £100. In the Midlands, this gap ranges from £117 to £122 per month.

Further south, where affordability is most strained, most renters would be significantly worse off each month if they purchased a home. In the South West, an average first-time buyer with a 5% deposit pays £341 more monthly to own a similar home. Meanwhile, in London, servicing a mortgage would cost the typical tenant an extra £775 per month, equating to £9,300 annually.

The chasm between renting and buying has lessened since mortgage rates peaked last year. In November 2022, the average tenant in Great Britain would pay £547 more monthly to buy their rental home with a 5% deposit, compared to the £300 extra needed last month. Although the gap has been shrinking, current mortgage rates remain a significant hurdle for most buyers with a small deposit.

Bank of England data reveals that the average mortgage rate for a would-be buyer with a 5% deposit currently stands at 6.1%. Nationally, this rate would need to plummet to around 4.2% to make the monthly costs of renting and buying with a 5% deposit comparable. In the south of the country, the required rate drop would be even more pronounced. In London, it would need to fall to 3.6% to equalize the monthly costs of renting and buying.

The high cost of buying versus renting is evident in statistics from the current mortgage guarantee scheme, which boosts 95% LTV lending by guaranteeing potential lender losses. High interest rates caused mortgage guarantees in 2023 to operate at just 35% of the 2022 average, with completions currently at around 15% of what Help to Buy achieved.

Completions under the mortgage guarantee scheme are typically concentrated in the north of England, where affordability is less strained. Government figures show the scheme has guaranteed three times more mortgages in the North West than in London.

Rental growth appears to be stabilizing. The cost of a newly let home in Great Britain rose to an average of £1,337 per month in May 2024, 6.3% or £79 more than the same period last year. This marks the third consecutive month where year-on-year increases averaged around 6%.

Conversely, rental growth for tenants renewing contracts continues to rise, with average renewal rents up 8.8% year-on-year in May, compared to 8.3% in April. The national slowdown in rental growth for newly let homes has been largely driven by London, where the annual growth rate fell to 3.9% in May 2024, the lowest since November 2021. Inner London was the only area to see rents decline annually (-2.3%) for the second consecutive month.

Smaller homes are experiencing steeper rent increases than larger ones, reflecting affordability challenges pushing tenants towards more economical options. May 2024 marked the first time in 11 months where rents for newly let one-bed properties (7.6%) rose faster than those for two-beds (6.2%).

Aneisha Beveridge, head of research at Hamptons, stated, “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.”