Concerned about rents rising and want to buy a home - is now the right time?

It’s cheaper to buy the home you rent in many regions outside of southern England. If you’re a renter looking to become a first-time buyer, is now the time to make a move?

The English Housing Survey shows that around 166,000 private renter households exit the rental market to buy their first home each year. There are another 87,000 who jump to home ownership directly, often from living with friends and family.

The decision to buy your first home is fraught with challenges and complexities, not least the outlook for the housing market and hoping that prices don’t fall, having made your first step into home ownership.

This is compounded by the fact that mortgage rates for new borrowers are more than double the level they were a year ago and the fact that selling schemes like the Help to Buy equity loan have now ended.

Many who would like to buy are feeling under growing pressure to move from the pace of rental growth. Annual rental costs for a renter moving home are up £2,200 since the pandemic, adding to financial pressures at a time when disposable incomes aren’t rising and other living costs are also on the up.

It is important to say that not all renters have a desire to buy and renting is a great flexible option for those that want to remain less tied to a home long term.

Recent house price index reports cover the detailed trends in the sales market and the outlook. They show that house price growth is slowing, but sales are still being agreed and buyers continue to enter the market. More importantly, we have 65% more homes available for sale than we did this time last year, boosting choice for would-be buyers of all types.

Sellers have been reducing asking prices steadily over the last 6 months as they try to make sure the price is in line with what buyers want to pay. This has been a generally uniform trend across the market. At the same time, sellers are also accepting average discounts of 4-5% off the asking price to help agree a sale. This varies around the country and reflects a return to more normal market conditions.

It’s important to note that in Scotland homes are typically marketed as ‘offers over’ with an accompanying valuation, so this notion of bidding less than the asking price is more of a trend in England, Wales and Northern Ireland.

Overall it looks like prices might fall by up to 5% over 2023 and in some areas we may not see any price reductions. This may not be what first-time buyers want to hear but it’s the outlook as things stand today. It’s fair to say housing market conditions are the most balanced between sellers and buyers for 4 years and slightly more in favour of the buyer.

Another big consideration is the cost of renting versus buying a home with a mortgage. If a first time buyer is comfortable with monthly rental costs, then this often becomes a benchmark for mortgage repayments and what is affordable.

The biggest hurdle for many first-time buyers is saving for the deposit – and many get support from friends and family to help with this. In recent years we have seen more first-time buyers using larger deposits than was the case before 2007. This is because mortgage rates are cheaper below 90% loan to value loans and there are more regulations that make it harder to access high loan to value mortgages from lenders.

Data from the Financial Conduct Authority up to mid 2021 shows almost two thirds (63%) of first-time buyers take mortgages below or equal to 85% loan to value (LTV).  Just over 1 in ten (12%) borrowed at or above 90% LTV, meaning a 10% deposit or less.

In 2017 almost 20% of first-time buyers used a 10% deposit or less, the result of higher house prices, which has more recently been compounded by higher mortgage rates.

We have compared the cost of renting versus buying across different areas of the UK. We assume a renter buys the home they rent in terms of size and price to make it a like-for-like comparison.

This table shows monthly mortgage repayments compared to monthly rents, assuming the borrower uses an 85% mortgage and takes a 30 year loan at a 4.5% mortgage rate.  It shows that in markets with lower house prices the monthly mortgage payments are lower than the monthly rental payments by up to 23%.

In London and the South East mortgage payments are higher than rents as house prices are higher. The reality is that first-time buyers in these regions typically need to put down more equity to afford to buy a home and reduce the monthly repayments to a more manageable level.

Low mortgage rates have enabled some first-time buyers to buy bigger homes than the ones they rent, especially in markets where house prices are at or below the national average.

Many have targeted buying a 3 bed home at a discount to the local market that needs some improvement work. This doesn’t work everywhere and really depends on where you are looking to live and the price of homes.

It’s important to acknowledge an extra complication for first-time buyers when looking at mortgage costs.  While many will see that mortgage payments are lower than their rent, lending rules can lead to you not being able to get a mortgage.

As part of the lending decision, banks need to make sure a new borrower can afford a higher mortgage rate than they will actually pay. This is called ‘mortgage affordability stress testing’ and it has been around since 2015.

It means the bank will check to see if you can afford to pay the mortgage at a rate that is closer to 6% or higher, even though you are seeking a loan for 4.5% as in the example above. This is all about ensuring borrowers don’t overextend themselves and have room to manage an increase in borrowing costs.

It’s an important regulatory tool for banks that has stopped an over-valuation of house prices in the last few years and means we are not facing a collapse in house prices today. It does, however, make it that bit harder to buy your first home, especially in locations where house prices are higher than average.

While mortgage rates have moved higher, our analysis shows that it is still cheaper to buy with an 85% LTV mortgage than to rent in many areas of the country, assuming you buy the home you rent. Buying a bigger home will shift this dynamic and first-time buyers also need to allow for the impact of affordability testing.

The first thing for a would-be first-time buyer to do is speak to a bank or mortgage broker to see what you can afford by way of a mortgage. Using this with your deposit will help you understand what price of home you can afford, allowing for the fact that there may be some wriggle room to negotiate on price.

The final general piece of advice to first-time buyers is don’t expect house prices to rise quickly in the coming years. Prices will rise but slowly, more in line with incomes. If you plan to buy your first home, ask yourself if it’s the right size and location for you to be there for 5-10+ years, rather than 2-4 years, unless you expect to inherit or gain access to equity to help fund that next move.

Key takeaways

• 75% of first-time buyers come from the rental market each year
• Across much of the country it’s cheaper to buy at 4.5% mortgage rates than to rent
• It pays to understand what you can afford as borrowing is more complex
• First time buyers should typically plan to buy a home that will work for the next 5-10 years