Interest rates have increased six times since December 2021 as the UK fights against rising costs in nearly every sector. For the last 10-or-so years, we have become accustomed to historically low-interest rates, but it looks like the tide is turning. For first-time buyers it poses the question, ‘should I rent or buy?’ Here, we look into the current situation to see whether buyers are better off renting for the foreseeable future or if it’s still worth getting on the housing ladder.
Unprecedented rental growth
Rental growth hit record levels throughout 2021, while mortgage rates simultaneously reached record lows. It meant would-be buyers were better off buying a home than renting in the private sector.
Data from a UK bank revealed that homeowners saved around £1,400 per year compared to renters. And in some parts of the UK, renting was as much as 20% more expensive than buying. Overall, rental costs grew by 6% nationwide in 2021, while homeownership costs increased by 2%. On average, renters paid £114 more each month.
Does that mean it’s cheaper to buy a home?
Last year (2021), it was cheaper to buy a home, but now the landscape has changed again. Rising interest rates look set to swing the scales for hopeful first-time buyers, as the cost-of-living crisis means unprecedented price changes across the board.
For the last 11 months, buying a home with a 10% deposit has been cheaper than renting. Yet, the latest interest rate from the Bank of England pushed the cost of buying back above renting by raising interest rates from 1.25% to 1.75%. It’s a reversal of pre-pandemic times when the average homeowner saved nearly £800 per year over renting.
The current state of play
Even though it’s cheaper to rent than buy, the rental market has still seen exponential growth. According to data, the average rent in the UK increased by 11.5% in May to £1,152 – the first rental growth to reach double digits since the Hamptons Index began in 2012.
However, with interest rates rising, renting is again cheaper than buying. Someone purchasing a home with a 10% deposit can expect to pay a further £41 per month on their mortgage, meaning their yearly average cost is £1,153. It marks a £1 difference from the average rent, meaning renting is cheaper than buying by £12 per year.
One pound doesn’t sound like much at all
On the face of it, many would argue that paying an extra £12 per year to own a home rather than rent is well worth the incremental rise in cost. While that might be the case, there’s still a threat that increasing the rate further will continue to push the cost of homeownership up.
Predictions forecast interest rates to increase beyond 2% before the year is out. Beyond that, some analysts believe rates will increase further in the first half of next year before the Bank of England reduces them in the year’s second half. It leaves would-be buyers with a decision: do you act now or wait and see how the current situation unfolds?
Should I rent or buy?
Potential buyers have plenty to think about, given the current circumstances. Buying is slightly more expensive than renting, but it could get worse. Does that mean you should secure a mortgage before rates go up again? Or do you hold off for 12 months and review the situation then?
Renting a home means you’re not tying yourself into any significant commitment, as rental contracts tend to be a maximum of 12 months. And in many cases, renting before buying can be a smart move if you want to see what happens in the market before making a decision.
Essentially, the decision will come down to your financial circumstances and what works for your budget. Some will be determined to buy a home if they have the deposit already, while others may decide to see what that market looks like in 12 to 18 months.
Renting or buying a home
Renting in the current landscape is marginally cheaper than buying a home if you go by the averages. Is that enough for you to rent instead of buying? Or do the pros of owning a home outweigh the additional costs? Whatever the answer, it should be one you’re entirely comfortable with and can manage financially.
Last Updated: August 18th, 2022
