Interest Rate Increases Make Renting Cheaper Than Buying

Latest interest rate rise makes renting cheaper than buying for the first time since 2014.

For the past 11 months it has been cheaper to buy a home in Great Britain than rent, but following last week’s interest rate rise, it’s now cheaper to rent than to buy, according to the lettings agency Hamptons:

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  • November 2021: It was £160 per month cheaper to service a mortgage with a 10% deposit than it was to rent the same home
  • May 2022: It was £40 per month cheaper to service a mortgage with a 10% deposit than it was to rent the same home. 

The Bank of England has now announced the fifth consecutive interest rate rise of 0.25% in a bid to tame inflation. Assuming that this will be passed on to mortgage borrowers in full, renting a home will become around £1 per month cheaper than the monthly cost of buying.

Rate increase will push monthly mortgage payments up

The rate rise will add a further £41 to the average monthly mortgage repayment for those with a 10% deposit, taking the average from £1,112 to £1,153.

Between mid 2020 and mid 2021, lenders raised mortgage rates for buyers with 5 or 10% deposits, meaning it was considerably cheaper to rent than buy during the pandemic. The Bank of England base rate remained at an all time low during this period, but other lenders hiked their rates to reduce risk.  

For the first time since 2014, the current higher mortgage costs mean renting is cheaper by an average of £65 per month than buying with a 10% deposit would be.

Head of research at Hamptons, Aneisha Beveridge, says: 

Rising interest rates are set to swing the scales for would-be first-time buyers. For the last 11 months it’s been cheaper to buy with a 10% deposit than rent due to rental growth running hot and mortgage rates near record lows. But [the latest] Bank of England base rate hike will change this once again, pushing the cost of buying back above renting – a reversal of pre-pandemic times when the average buyer saved nearly £800 a year by owning rather than renting. 

Beveridge added that for many buyers, it’s not just the challenge of making higher monthly repayments, but the saving up for the deposit that is holding them back. With more interest rate rises expected, mortgage rates are set to peak around the middle of 2023. Beveridge feels that this will mean ‘that for new buyers with smaller deposits, the monthly cost of purchasing a home will be significantly higher than renting one.’

If there are any further similar increases to the base rate, it will likely add a comparable amount to mortgage repayments, which will hit first time buyers and people remortgaging first. 

If you’re curious how this will affect your mortgage plans, use our free Mortgage Calculator to find out. 

Regional variations

In the south of England, it is typically cheaper for someone with a 10% deposit to rent rather than buy whereas further north it’s generally cheaper to buy than rent.  

In January 2022, it was cheaper to buy than rent in every region of the country. In May, across Britain, it averaged £40 per month cheaper to buy than rent, with the regional breakdown as follows:

  • Southeast: Cheaper to buy than rent by £1 pcm
  • Southwest: Cheaper to buy than rent by £2 pcm 
  • East of England: Cheaper to buy than rent by £64 pcm
  • East Midlands: Cheaper to rent than buy by £44 pcm
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