Mortgage guarantee schemes will fall short as renting still cheaper than buying with a 5% deposit

Would-be buyers with a 5% deposit face paying £300 per month more in mortgage repayments than if they continued renting, the latest Hamptons Monthly Lettings Index reveals.

And to make the monthly cost of renting and buying in Great Britain similar average mortgage rates would need to fall from 6.1% to around 4.2% – a move most pundits don’t see happening anytime soon.

PERMANENT FIXTURE

Last week The Neg revealed that Labour would make the existing mortgage guarantee scheme – which sees the government act as a guarantor for people unable to save big deposits – into a permanent fixture if it wins the election on 4 July under its ‘Freedom to Buy’ proposal.

But such a move will make little difference to most southern homebuyers. Higher mortgage rates mean buying with a 5% deposit doesn’t work financially in most places south of Birmingham.

Across Scotland and the three northern regions of England (North West, North East and Yorkshire & Humber) the monthly cost difference between renting and buying with a 5% deposit is below £100 per month. In the Midlands there’s a higher difference of £117 to £122 per month.

But further south, where affordability is most stretched, most renters would find themselves significantly worse off each month by purchasing a home.

In the South West, an average first-time buyer with a 5% deposit pays £341 per month more to buy a similar home.  Meanwhile, in London, servicing a mortgage would cost the average tenant an extra £775 per month, which equates to £9,300 a year.

COST-EFFECTIVE

Aneisha Beveridge, Head of Research at Hamptons, says: “Despite rental growth setting at around 6% year-on-year, renting remains more cost-effective than buying for most households across the country.

“High mortgage rates have squeezed buyers with small deposits out of the market, forcing more households to rent for longer. The uplift in the monthly cost to buy a home with a small deposit has made purchases unviable in most places south of Birmingham.”

She adds: “Both the Labour and Conservative Parties have included mortgage guarantee schemes in their manifestos to boost the availability of 95% loan-to-value deals.

“However, their effectiveness will probably be determined by Threadneedle Street rather than Downing Street. The extent to which the Bank of England reduces rates will shape the numbers of would-be buyers with small deposits more than the best-designed government policy.”