Renters spend more on housing costs each month than homeowners

Renters fork out considerably more of their monthly income on their home each month than mortgage-holders, according to the latest English Housing Survey.

Renters face significantly higher housing costs than owner occupiers, according to the latest English Housing Survey.

Private renters spend 31% of their household income on rent each month, while those buying a home with a mortgage spend just 18%.

The English Housing Survey findings for 2020/21 come as our own research shows that rent increases hit a 13-year high.

The cost of renting a UK home outside London, now stands at £809 per month, according to our latest Rental Market Report.

The good news for potential buyers is that there has been a steep increase in the number of people getting on to the property ladder.

The number of first-time buyers in 2020/2021 reached 957,000. That’s over 130,000 more than the previous year.

A total of 61% of people in the private rented sector expect to be able to buy their own home at some point, according to the survey.

Of those, 35% expect to be able to step onto the property ladder within the next two years.

Why are renters paying more?

People in the private rented sector paid an average of £198 a week for their home. While people with a mortgage paid £174 a week.

Part of the discrepancy is caused by the fact that homeowners are currently benefiting from record low mortgage rates.

At the same time, private landlords are facing increased costs due to tax changes and new regulatory requirements. Some of these costs are being passed on to tenants.

Also, private sector rents reflect the current market rate, because rents are typically adjusted when tenants’ contracts are renewed.

Homeowners typically take around 25 years to fully own a property outright if they are buying it with a mortgage.

The owner-occupier figures include people who bought years ago when house prices were lower. This means their mortgage payments are lower than if they were buying today.

How many people are in private rented homes?

One in five people in England rent a home in the private sector, rising to 27% in London.

Younger people are more likely to rent, with 65% of people in the private rented sector aged under 45.

There has been an increase in older age groups who rent.

There are 11% of people aged between 55 to 64 letting in the private sector, double the proportion a decade earlier.

While, the number of people aged between 45 and 54 renting stands at 16%, up from 11% 10 years ago.

How did so many people buy homes this year?

The number of first-time buyers in 2020/2021 reached 957,000. That’s 131,000 more than in 2019/2020.

Many of these buyers will have taken advantage of the stamp duty holiday which ended in June.

The average first-time buyer was 32 when they got on the property ladder, rising to 34 in London, according to the survey.

First-time buyers put down a typical deposit of £44,294, while 62% opted for a mortgage term of 30 years.

The steep increase in first-time buyers is likely to reflect the amount of government support available for those getting on to the property ladder.

What government help is available to first-time buyers?

The Help to Buy equity loan is the flagship scheme which enables first-time buyers to purchase a property with just a 5% deposit.

The government then tops this up with a 20% equity loan, which is interest-free for five years.

In September, the government announced plans to deliver 57,000 affordable homes for first-time buyers to purchase through schemes such as shared ownership.

First-time buyers are also exempt from paying stamp duty on the first £300,000 of a property purchase on a home costing up to £500,000.

Other schemes include First Homes, under which first-time buyers, key workers and local people, can purchase a home at a 30% discount to its market price.

While the 95% mortgage guarantee scheme helps buyers get a mortgage with just a 5% deposit.

First-time buyers can also save for a deposit using the Lifetime ISA, which the government tops up with a 25% bonus of up to £1,000 annually.


Bank of England reveals plan to relax mortgage affordability rules

The suggested affordability changes should make it easier for first-time buyers to get mortgages in 2022.

The Bank of England has announced plans to relax mortgage lending rules.

At the moment, borrowers have to show they’d be able to afford the repayments if their mortgage reverted to their lender's higher variable rate and interest rates jumped 3% .

This test is designed to check buyers could still meet mortgage payments if rates went up.

But the Bank’s Financial Policy Committee (FPC) has decided this affordability rule is no longer needed.

It will consult mortgage lenders and other industry parties early next year about withdrawing the 3% interest rate rule.

The change is likely to offer better mortgage opportunities to first-time buyers.

Why are mortgage affordability rules being eased now?

A number of new affordability guidelines were introduced in 2014.

This idea was to protect the banking system from high levels of household debt following the financial crisis of 2008.

At that time, the FPC recommended that lenders limit the number of mortgages they offered to people borrowing 4.5 times their income.

It also asked lenders to make sure borrowers could afford their mortgage repayments when their fixed-rate deal ended.

This calculation was based on interest rates increasing by 3%, and borrowers being moved on to their lender’s “reversion rate” or higher standard variable rate, which is typically 4.5% or higher.

The reforms were introduced when interest rates were expected to rise to 2.25% in the coming five years.

Today, the Bank of England base rate currently stands at 0.25%.

While interest rates are expected to rise next year, they are likely to do so at a much slower rate than previously expected.

Meanwhile, the FPC has decided other limits on how much banks can lend to people are enough to protect financial stability.

This includes limiting the number of mortgages given to people borrowing a high multiple of their income to just 15%.

Who does the change in mortgage affordability rules affect?

The end of the higher standard variable plus 3% interest rate affordability rule is great news for first-time buyers.

The fact that people buying their first home typically have lower salaries and smaller deposits meant they were more impacted.

For example, a borrower applying for a two-year fixed rate mortgage with interest charged at 1.99%, would have to show they could still afford repayments if the interest rate was 7.5%.

While monthly repayments on a £160,000 mortgage at 1.99% are £682, they would nearly double to £1,196 if the rate was 7.5%.

The rule led to thousands of borrowers being told they could not afford a mortgage, even though they were never likely to face repayments at such high interest rates.

The changes are likely to mean more first-time buyers make it onto the ladder in 2022.

But, the announcement was not all good news for first-time buyers.

The FPC has decided to keep limits in place on the number of high loan-to-income mortgages lenders can provide to borrowers.

Mortgages are getting cheaper for first-time buyers 

More good news for first-time buyers is that the average cost of a mortgage for people with only a 5% deposit has fallen to a record low.

The typical cost of a two-year fixed rate mortgage for someone borrowing 95% of their home’s value fell for the eighth month in a row in November to 3.09%.

Meanwhile, the cost of a five-year fixed rate deal dropped to 3.39%.

Both rates are the lowest financial information group Moneyfacts has recorded since records began in 2011.

The number of different mortgages available to all borrowers has reached the highest level since 2008.

Homeowners now have more than 5,300 different deals to choose from.

This includes more than 700 mortgages for borrowers with deposits of 10% or less.

First-time buyers struggled to get a mortgage in 2021

This year saw plenty of first-time buyers have their mortgage applications rejected by banks or building societies.

Only 35% of first-time buyers had their first mortgage application approved in 2021.

This is compared with 48% who were approved first-time in March 2020, according to research by specialist lender Aldermore.

The reasons buyers were turned down for a mortgage included:

  • a poor credit history
  • administrative errors
  • not having a large enough deposit.
  • having taken out a payday loan
  •  being self-employed
  • having an irregular income
  • a high level of debt.

Buyers surveyed blamed the situation on the Covid-19 pandemic.

Half of those surveyed had experienced disruption to their employment, such as being furloughed or made redundant.

While 2022 looks set to offer more mortgage opportunities, buyers will still need a good credit score.

What else is happening in the mortgage market?

Mortgage lending looks set to reach a record high in 2021.

This is on the back of high levels of housing market activity caused by the pandemic-induced search for space and stamp duty holiday.

Lenders are expected to have advanced a total of £316bn-worth of mortgages during the year.

That’s 31% more than in 2020, according to mortgage industry body UK Finance.

The prediction is in line with our own data that estimates one in every 16 properties will change hands this year.

We’ve seen the busiest property market for 14 years, and the increase in activity has not just been seen among homeowners.

Lending to buy-to-let landlords soared by 83% year-on-year to £18 bn, the UK Finance figures showed.

The private rental sector currently faces a significant mismatch between supply and demand.

A shortage of homes to rent has been putting upward pressure on the cost of renting.

The cost of renting a home in the UK outside of London is now £809 a month on average.

But the increase in buy-to-let lending revealed by UK Finance suggests landlords have been buying more homes this year.

An increase in supply will potentially mean less competition for rentals, which could moderate rental costs.


Interest rates go up for the first time in 3 years

Nearly 2m homeowners will face mortgage repayment increases of around £10 to £15 a month as the Bank Rate rises to 0.25%

The Bank of England has increased interest rates for the first time in more than three years.

The Bank Rate, otherwise known as the official cost of borrowing, has gone up from a record low of 0.1% to 0.25%.

The move by the Monetary Policy Committee (MPC) means nearly 2m homeowners will see their monthly mortgage repayments go up.

The change will add around £14 a month to repayments on a £200,000 mortgage.

But the majority of mortgage-holders will not be affected by the hike as they have fixed-rate loans.

Why are interest rates going up?

Inflation has reached a 10-year high, which is why interest rates are going up.

The MPC can move interest rates up or down to help manage inflation.

Inflation is the rate at which the things we buy are getting more expensive. It is measured by the Consumer Prices Index.

Inflation reached 5.1% in November, more than double the Bank of England’s 2% target.

Raising interest rates helps to cool inflation by making it more expensive to borrow money.

Higher interest rates discourage individuals and businesses from spending, which causes the economy to slow and price rises (inflation) to ease.

Will my mortgage payments go up?

Some mortgages move up and down in line with changes to the Bank Rate.

These mortgages might be tracker deals or the standard variable rates that borrowers revert to once a fixed-rate deal ends.

As a result, any borrowers on one of these home loans are likely to see the cost of their monthly repayments go up. But the increases will not be large.

Mortgage trade body UK Finance estimates the 850,000 people with a tracker mortgage will see their monthly repayments rise by an average of £15.45.

Meanwhile, the 1.1m borrowers on a standard variable rate will face an increase of £9.58 per month.

But the majority of mortgage-holders will not see any change. This is because 74% of mortgage-holders are on fixed rate deals.

Under a fixed-rate deal the interest rate you pay stays the same for the length of the product - typically two or five years.

What’s the wider impact of interest rate rises?

There was some but not a lot of surprise that the Bank Rate went up to 0.25%.

Despite the economic uncertainty created by the omicron variant, the MPC had been expected to raise the official cost of borrowing from its record low level.

As a result, many mortgage lenders had already priced in a possible increase into the interest rates they were offering on new deals.

This, combined with the fact that the Bank Rate only increased by 0.15%, means the cost of new mortgage deals is unlikely to shoot up in the near future.

That said, economists are expecting further rate hikes in 2022, with some predicting the official cost of borrowing could end the year as high as 1%.

Mortgage rates are expected to trend up during the coming 12 months. But strong competition in the market means rates are likely to remain relatively low.

If you’re currently thinking of remortgaging, it makes sense to do so sooner rather than later.

The interest rate increase is expected to have only a very limited impact on the housing market more broadly.

The cost of borrowing is only one of the factors that affects house price growth, and interest rates are still very low by historical standards.

Strong demand from buyers, high levels of employment and a shortage of homes for sale is likely to continue to put upward pressure on property prices.