Falling mortgage rates mean it’s cheaper to pay a monthly mortgage than rent, Hamptons research has revealed.
Typical mortgage rates of just over 5% for a first-time buyer with a 10% deposit mean the average monthly mortgage payment (£1,328) is slightly cheaper than the average rental payment (£1,356).
The cost of a newly agreed tenancy in Great Britain rose by 1.5% in March against slight reductions in the mortgage rate.
Aneisha Beveridge, head of research at Hamptons, said: “Since the 1980s, it’s typically taken an economic shock for renting to drop materially below the cost of buying.
“When this happens, it’s almost always driven by the cost of buying rising rapidly, pushed up by mortgage rates jumping for those with smaller deposits who are perceived to be riskier borrowers when prices may fall. But we are now seeing the impact of the inflation shock unwinding.
“Relative to the cost of paying a mortgage, rents tend to be much less volatile. Typically, they’re tightly tied to both wages and inflation. This means that while they rarely fall, they also tend to rise more slowly unless general inflation escapes its 2% target. When this happens, rents are often driven up by the higher costs faced by landlords, like we saw in 2022-2023, ranging from higher mortgage payments to bigger bills from tradesmen.
“Should central banks perceive an emerging trade war as a growing threat to economic growth, it could create room for faster rate cuts. This could translate into falling mortgage rates, potentially cutting the cost of both buying and potentially renting too. Given these costs form a large part of official inflation statistics, this would put material downward pressure on the headline inflation figure.”
Since January 1987 there have only been three occasions when renting has been cheaper than buying for someone purchasing a home with a 10% deposit over a 30-year mortgage term. During these three occasions, it was rising mortgage rates that pushed up the cost of buying rather than rents falling.
Firstly, in the early 1990s, mortgage rates hit 15%, pushing the average monthly mortgage payment for someone with a 10% deposit up to £649, nearly double the cost of renting at £358. As interest rates fell, the trend normalised and buying became cheaper throughout the rest of the 1990s and most of the 2000s.
It wasn’t until around 2007 when banks raised rates on small deposit mortgages that the balance swung back in favour of renting again and remained that way until 2010. The third instance when renting became cheaper than buying occurred just after the ‘mini budget’ (back in 2022), when mortgage rates rose steeply.
While nationally, the monthly cost of renting remains similar to the cost of buying today, the figures mask a north-south divide. In all four southern regions, it remains cheaper to rent a home than buy it on a monthly basis.
In London, renting has been cheaper than buying since July 2022, when mortgage rates stood at 3.69%. Today, the average Londoner could save £115 per month by renting.
Further north it typically remains cheaper to buy than rent on a monthly basis, even at much higher interest rates. In the North East, the monthly cost of renting hasn’t been higher than the cost of buying since July 2011.
