July 2021 | Buy-to-Let

Cheaper to rent than buy?

Jane Simpson is managing director of TBMC

It was interesting to read about the recent report by the estate agents Hamptons, which indicated that in the UK it is currently cheaper to rent than buy a property, making for some eye-catching headlines.

The research showed that prior to the pandemic in March 2020, buyers purchasing with a 10% deposit were better off on average by £102 per month, but in last month’s report private sector renters were better off by £71 per month.

According to Hamptons, in early 2020 it was cheaper to buy than rent in every region of the UK, but now it is only cheaper to buy in four areas – the North East, North West, Yorkshire and the Humber, and Scotland.

What is most impressive about these findings by Hamptons is that it is cheaper to rent despite the 7.1% increase in average rents over the last 12 months. This is mainly because there has been strong growth in house prices, while the availability of more expensive higher loan-to-value (LTV) mortgages has contributed to the cost of buying a residential property.

Unsurprisingly, there are regional variations in the disparity between buying and renting. For example, the report found it was £108 cheaper per month to rent in the South West, £117 cheaper in the East of England and £251 cheaper in London.

London has been most significantly affected, exacerbated by the fall in tenant demand and rents during the course of the pandemic.

During the lockdown periods many university students moved back in with their parents, and the increasing number of people now working from home means they are less tied to the daily commute to an inner-city office. Some have now moved out of the capital either temporarily or for the long-term.

Another factor to consider has been the availability of mortgages for first time buyers. During the early days of the pandemic, lenders either increased prices or withdrew higher LTV mortgages, making it difficult for those looking to buy their first home without a large deposit.

A year later and the mortgage market is recovering, with more low deposit residential mortgages now available. According to Moneyfacts, 80 new products up to 95% LTV were launched in May 2021.

However, there is still less choice, and the average interest rate for 2 and 5-year fixed rates is higher than before the pandemic.

Some applicants, even those with higher deposits, may also find it difficult to obtain a residential mortgage if they have been furloughed or experienced any credit issues during the pandemic.

Although the cost of getting a residential mortgage may return to pre-COVID levels at some point in the future, the current market conditions are beneficial for buy-to-let property investors in most areas of the UK, as tenant demand remains strong.

There have also been reported increases in the levels of savings during the pandemic, so with interest rates on savings at an historic low, now could be an excellent time to consider investing in bricks and mortar.

This may result in renewed interest from amateur landlords or an expansion of portfolios for seasoned investors.

With plenty of lender and product options for landlord clients, 2021 could be a productive year for intermediaries in the buy-to-let sector.