Renting is cheaper despite rising rents

It was interesting to read about the recent report by Hamptons, the estate agents, 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 per cent deposit were better off on average by £102 per month, but in last month’s report private sector renters were better off by £71per 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 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 and the availability of more expensive higher loan-to-value mortgages have contributed to the cost of buying a residential property.

Regional variations

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 and £251 cheaper in London.

London has been most significantly affected, exacerbated by the fall in tenant demand and rents during the pandemic. During the lockdown periods many university students moved back to 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 city 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 loan-to-value mortgages, making it difficult for those looking to buy their first home without a large deposit.

Mortgages for first time buyers

A year later, the mortgage market is recovering with more low deposit residential mortgages now available. In fact, according to Moneyfacts, 80 new products up to 95 per cent LTV were launched in May 2021, albeit there is still less choice and the average interest rate for 2 and 5year fixed rates is currently 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 brick sand mortar. This may result in renewed interest from amateur landlords or an expansion of portfolios for seasoned buy-to-let investors.

Positivity in the marketplace

There has been plenty of positive movement in the buy-to-let sector in recent months which has been supported by numerous reports and surveys from different corners of the market.

Moneyfacts reported in late May that average buy-to-let mortgage rates have been on a downward trajectory and reached some of the lowest pricing since the beginning of the year. It calculated the average 2 year fixed rate across all LTVs was 2.95% compared with 3.05% in March. Only January 2021 had a lower average at 2.89% so far this year.

Clearly an average calculation does not show all price movements and some higher LTV products have increased, whereas the lowest 2 year fixed rate available via our brokerage at the time of writing is 1.19%. What it does show though is that there is healthy competition in the market and that lenders are constantly tweaking their product ranges to meet customer demand.

Rise in rents

There has also been news from Hamptons, the estate agents, of a rise in rents which may bode well for landlords. In its latest Lettings Index April 2021, Hamptons showed that average rents rose by 5.9% in Great Britain which was the fastest growth since January 2015. Paragon Bank also reported that during the first quarter of 2021 average rental yields across England and Wales were at 6 per cent, up from5.3 per cent in Q1 2020.

This is encouraging news for potential property investors looking at the prospects for buy-to-let, although the Lettings Index did show considerable regional variations, suggesting that landlords should investigate the rent expectations and tenant demand for the particular area they are looking to purchase property. To illustrate, the highest rental yields recorded in the Paragon Bank survey were in the South West (6.7 per cent) and the North East (6.6 per cent).

Not only are there positive signs in the buy-to-let sector for landlords, but it appears that mortgage brokers are also starting the feel more confident in the market. According to Paragon’s recent quarterly Financial Adviser Confidence Tracker, half of intermediaries polled expect to write more buy-to-let mortgage business during the coming year than in the past year, which is the highest level of confidence found since 2014. 

Lender confidence

It seems that the appetite of lenders is also strong, not only with competitive pricing being evident but also with the development of new product propositions and improving criteria. The specialist buy-to-let sector is certainly in a good state with a wide selection of providers for complex cases such as HMOs, multi-unit blocks, semi-commercial and limited company applications.

More niche lending areas such as for holiday lets are also improving, with Interbay and Paragon recently joining other lenders in this arena. Other good signs for buy-to-let brokers and their landlord clients is the return of the Precise top slicing proposition which allows applicants to use surplus portfolio rental income or earned disposable income to support their affordability assessment.

It is encouraging to see growing optimism across the dynamic buy-to-let sector and it is reasonable expect some growth in the overall level of buy-to-let lending in2021, as key drivers such as tenant demand, strong rents and the availability of finance, continue to support the private rental sector in the UK.