According to recent analysis by Hamptons, prospective homebuyers facing the prospect of purchasing with a 5% deposit might find themselves shelling out an additional £300 per month in mortgage repayments compared to continuing to rent. This stark difference underscores the financial challenges many face when trying to transition from renting to owning a property.

The disparity in monthly costs between renting and buying with a minimal deposit becomes more pronounced due to current mortgage rates hovering around 6.1%. Hamptons suggests that for the financial burden to equate, these rates would need to decrease significantly, dropping to approximately 4.2%. This adjustment would help align the monthly expenses associated with renting and buying homes across different regions in Great Britain.

In practical terms, the higher mortgage rates particularly impact the financial viability of purchasing homes with a 5% deposit, especially in southern regions of the country, such as areas located south of Birmingham. The financial landscape suggests that renting continues to be a more economically feasible option for many prospective buyers, highlighting the challenges posed by existing market conditions and lending criteria for those looking to step onto the property ladder with minimal upfront capital.

Across Scotland and the three northern regions of England (North West, North East, and Yorkshire & Humber), the difference in monthly costs between renting and purchasing with a 5% deposit remains modest, staying below £100 per month. Moving into the Midlands, however, this gap widens, ranging between £117 to £122 per month.

In the more southern regions, where housing affordability is more strained, the financial disparity between renting and buying is stark. In the South West, for instance, prospective first-time buyers with a 5% deposit can expect to pay approximately £341 more per month to own a comparable property. Meanwhile, in London, the contrast is even more pronounced, with renters facing an additional £775 in monthly mortgage costs, equivalent to an annual burden of £9,300.

Despite these significant figures, it’s worth noting that the margin between renting and buying has narrowed recently, particularly since the peak in mortgage rates observed last year. This adjustment reflects changes in the housing market and lending conditions, influencing the financial calculations for those considering the transition from renting to homeownership.

In November 2022, the typical tenant in Great Britain faced a monthly cost of £547 to purchase their rented home with a 5% deposit, representing an increase of £247 from the previous month’s additional £300 required for buying.

Despite the narrowing gap, current mortgage rates continue to pose a significant barrier for most buyers with limited deposits, exacerbated by stress tests that apply even higher rates. Additionally, sluggish house price growth has slowed down the pace at which homeowners can accumulate equity to facilitate their future property moves.

According to Bank of England figures, the average mortgage rate offered to prospective buyers with a 5% deposit currently stands at 6.1%. Nationally, this rate would need to drop to approximately 4.2% to align the monthly costs of renting and purchasing with a 5% deposit. Across southern regions, including London, even greater reductions in mortgage rates would be necessary; in London specifically, achieving parity in monthly costs would require a rate as low as 3.6% (see Table 1).

The disparity in costs between buying and renting is evident in data from the current mortgage guarantee scheme, initiated in 2021 to bolster 95% loan-to-value (LTV) lending by essentially insuring potential lender losses. Due to elevated interest rates, the number of mortgage guarantees issued in 2023 amounted to only 35% of the average seen in 2022, with completed purchases currently at approximately 15% of the Help to Buy scheme’s peak.

The areas where the mortgage guarantee scheme has seen the most activity are predominantly in the northern regions of England, where housing affordability is comparatively less strained. Government statistics up to the end of 2023 reveal that three times as many mortgages have been guaranteed in the North West compared to London.

Aneisha Beveridge, Head of Research at Hamptons, comments, “Despite rental prices rising by around 6% year-on-year, renting remains a more financially viable option than buying for many households nationwide. High mortgage rates have squeezed potential buyers with minimal deposits out of the market, leading to an extended period of renting for a growing number of households. The increased monthly costs associated with purchasing a home using a small deposit have rendered buying economically unfeasible in most areas south of Birmingham.”

Both the Labour and Conservative Parties have proposed mortgage guarantee schemes in their manifestos to facilitate 95% loan-to-value deals. However, the effectiveness of these initiatives may hinge more on decisions made at Threadneedle Street (the Bank of England) than on policies crafted at Downing Street (the government offices). The Bank of England’s actions in reducing interest rates will likely have a greater impact on the number of prospective buyers able to access mortgages with small deposits than the specific details of government schemes.

Moreover, in a climate of elevated interest rates, the uptake of the Conservative Party’s proposed 0% capital gains tax incentive for landlords to sell to their tenants is anticipated to be limited. Instead, a scheme akin to Help to Buy is deemed more appropriate for assisting renters with modest deposits in transitioning to homeownership. The Help to Buy Equity Loan, for instance, proved effective in enhancing affordability in costly housing markets by supplementing deposits and significantly reducing initial mortgage payments over the initial five-year period.

Table 1 – The rate required to equalise the monthly cost of renting and buying with a 5% deposit in May 2024

London 3.6%

East of England 3.8%

South West 3.8%

South East 3.9%

Wales 4.7%

East Midlands 4.9%

West Midlands 5.2%

Yorkshire & Humber 5.7%

North West 6.0%

Scotland 6.2%

North East 6.8%

Great Britain 4.2%

Table 2 – Rental growth on newly let properties in May 2024

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