Study reveals financial benefits of being a home owner
Paying a mortgage rather than renting privately could leave the average consumer £350,000 better off over next 30 years, new research has found.
This ‘home owner bonus’ includes the £133,700 an average owner could expect to save when paying a mortgage rather than rent over that time, as well as the additional £218,000 of equity gained from paying that mortgage off. It assumes no house price inflation.
The study from the Intermediary Mortgage Lenders Association (IMLA) reveals that while private renters might expect to pay out £451,600 over the next 30 years, taking into account a projected increase of 2% in rent per year, a home owner on a 25 year repayment mortgage could pay £317,900 if interest rates remain at current levels.
Over a 30 year period, a home owner would pay £133,700 less than a private renter. When adding the accumulation of equity, the average home owner could be £352,500 better off over the next 30 years than if they were to rent the average privately rented property, without factoring in any potential increases in house prices.
Beyond 30 years, the home owner would benefit even further as they would no longer face mortgage payments, whereas someone who was renting would continue to have to do so into and throughout retirement.
The research from IMLA highlights the potential financial disadvantage facing those who do not or who are unable to step onto the housing ladder now, even if house prices don’t increase. Taking into account any house price inflation, the financial advantages of owning a home could be even higher.
The report also reveals that mortgage rates would have to be in excess of 11.5% throughout the life of a loan before owning and renting produced equal expected financial returns. This is far beyond even current stress testing which lenders have to conduct when assessing borrower affordability.
The research suggests that rising house prices is not the main barrier to first-time buyers. Rather, it suggests that the sharp tightening of mortgage lending criteria in the wake of the financial crisis prevented many consumers from getting on the ladder while the subsequent increase in regulation has limited options for potential buyers to become home owners.
It points out that the virtual disappearance of higher loan to value loans meant that buyers had to find much larger deposits, something many found beyond their reach without significant help from family and friends, despite that fact that the prevailing low interest rate has meant that once a loan is in place, it is affordable.
‘Becoming a home owner is a life changing experience. It can also transform your long term finances and this research quantifies the extent of that transformation. The long term benefits of being a home owner are not just confined to the property value and the potential for house prices to increase. Home owners also potentially save hundreds of thousands of pounds compared to their private renter counterparts,’ said Kate Davies, IMLA executive director.
‘Despite the financial benefits of buying a house, there has been a marked decline in home ownership amongst younger people. This is not only due to the rise in house prices relative to income. Reduced mortgage availability after the financial crisis, and the need for buyers to find higher deposits, caused a sharp fall in the number of first time buyers,’ she explained.
‘The overlay of stricter affordability criteria introduced into the mortgage rules has added to the problems faced by potential buyers trying to get on the ladder. People who have been renting privately and comfortably making their monthly payments are struggling to obtain a mortgage with the same or even lower monthly payments, while the near disappearance of interest only as a route to managing affordability has cut the number of options for first time buyers,’ she added.
The IMLA is calling on the Government to commission an independent cost benefit analysis of the current regulatory regime for mortgages to assess whether current regulations could be contributing to potential consumer detriment by excluding some consumers from homeownership.
‘This research identifies some very interesting statistics and we think that now would be a good time for the Government to take stock and assess whether current mortgage regulation is working as intended. A cost benefit analysis which takes account of the long term costs to consumers of not being able to buy a home of their own would hopefully indicate whether taking a more holistic approach, which considers the costs to consumers of not buying, would justify changes to the current regulatory position,’ said Davies.
‘Whilst this report highlights a stark difference in the long term financial position of those who buy as against those who rent, it also underlines the importance of a continuing and healthy private sector for those who are renting, whether they need to rent long term or are saving up to buy their own homes,’ she explained.
‘The PRS continues to play a vital role in Britain’s housing market as well and IMLA will continue to champion the need for a vibrant and competitive sector which provides homes for millions of people who need or want to rent. But we do think it is important that the Financial Conduct Authority and the Bank of England should acknowledge and take account of the financial situation for those who cannot buy or enter social housing when implementing rules in the mortgage market,’ she concluded.