Covid makes renting more cost-effective for Britons than buying a home

Despite rising rents, house prices have soared over past year

An array of To Let and For Sale signs in Birmingham, UK. Hamptons said strong house price growth during the pandemic and higher mortgage rates have made buying a home a more expensive option for Britons. Getty ImagesShow less

The pandemic has made it cheaper for Britons to rent a home rather than buy for the first time in seven years, despite rents rising over the past year, according to Hamptons.

The average tenant in the UK spent £71 ($100) a month less on rent in May than if they were servicing a 90 per cent loan-to-value mortgage on the same home, research from the real estate agency found.

In comparison, a buyer purchasing a property with a 10 per cent mortgage deposit before the pandemic started would have been £102 better off if they bought a home rather than renting one.

Aneisha Beveridge, Head of Research at Hamptons, said the pandemic has reversed the trend of buying being more cost-effective than renting because of strong house price growth and higher mortgage rates.

“A year ago, lenders were either increasing their rates or withdrawing higher loan-to-value mortgages altogether,” Ms Beveridge said.

“For first-time buyers in particular this pushed up the cost of paying a mortgage, if they could get one at all, to well above the cost of renting.”

Hamptons' cost comparison analysis between renting and buying is based on a consumer placing a 10 per cent deposit on a home to secure a 90 per cent mortgage on a two-year fixed rate. The average annual rate in May was 3.32 per cent, up from 1.94 per cent a year earlier.

The cost of servicing this mortgage is then compared to the cost of renting the same home.

Britain's property market has soared since the start of the pandemic, after a total shutdown of the sector during the first lockdown led to pent-up demand for homes.

Chancellor of the Exchequer Rishi Sunak's stamp duty holiday, first unveiled in July last year and set to expire on June 30, bolstered the market further.

In May, prices surged to an average record high of £261,743, according to the Halifax House Price Index, up 9.5 per cent from the same month a year earlier – equivalent to £22,000 over 12 months.

Meanwhile, rental growth accelerated in May to a record high, with the average cost of a newly-let rental home rising to £1,054 per month, up 7.1 per cent from the same month last year, according to Hamptons’ Monthly Lettings Index.

The regions recording the biggest rises included south-east England, where rents rose 13 per cent and south-west England, with an increase of 11.5 per cent, as many Britons moved out of cities in search of larger homes due to the pandemic.

As a result, London was the only UK region where rents fell, declining 0.5 per cent on the year in May.

While it is currently more cost-effective to rent, Ms Beveridge expects the balance to swing back towards buying once mortgage rates edge down again, although this will be partly offset by rising house prices.

"While interest rates are falling, they’re still considerably above where they were pre-pandemic on higher loan-to-value loans," said Ms Beveridge.

"Despite this, we expect the gap between renting and buying to close over the remainder of this year, moving back towards longer-term levels in 2022.”