Cheaper to buy than rent in the UK, new research suggests

Buying a property in the UK is 14% more affordable than renting with tenants paying almost £100 a month more than the cost of a mortgage, it is claimed.

The cost associated with buying a home in the UK is typically 14% lower than renting a property, according to new research by the Halifax. It says that the average monthly costs associated with buying a three-bedroom house in the UK stood at £608 in March 2011, some 14% (£98) lower than the average monthly rent paid on the same property type of £706. Three years ago, the average cost of buying was 43% more than the typical rent paid and the significant fall in the monthly cost associated with buying compared to renting has been driven by the decline in the average mortgage rate since 2008, it explained.

The mortgage rate for a new borrower has fallen to an average of 3.59% from 5.82% in March 2008, helping to reduce the average monthly mortgage payment by 39%.

Currently, buying costs account for a smaller proportion of average UK disposable income, pegged at 27% compared with rental payments of 31%, the research showed. In 2008, buying costs accounted for a greater proportion of average disposable income than rent at 56% against 39%.

Despite the improvement in the affordability of buying relative to renting, the tightening in lending criteria since 2007 has meant that many potential buyers have not attempted to enter the market. Nonetheless, market data shows that the average deposit paid as a percentage of the purchase price has been broadly stable since early in 2009 at around 27%, following a marked rise in 2008.

Transaction costs including stamp duty and the fees associated with home purchase also add to the overall costs of buying a property. The average stamp duty bill for a three-bedroom house was £1,639 in March 2011, 18% or £358 lower than the average in March 2008 although first time buyers are exempt on purchases below £250,000. Switching from buying to renting could release equity worth £55,000, the Halifax found.

Despite the advantages of buying versus renting, existing mortgage holders looking to switch to renting could enjoy the financial benefits of releasing the remaining equity in their property. Selling up your property and renting instead would provide an average equity of approximately £55,000. Investing this in a fixed rate bond would generate a monthly income of £114 to use to offset rental costs.

‘The typical monthly mortgage payment has declined by over a third since 2008 as a consequence of falling mortgage rates and lower house prices. As such, the fall in the cost of buying a property compared to the average rent paid by tenants has been significant,’ said Suren Thiru, housing economist at the Halifax.

‘Such a marked decline in mortgage costs has improved affordability for those able to enter the market as well as helping to ease the pressure on existing homeowners’ disposable income,’ Thiru explained.

‘Although the current trade off between buying and renting is expected to narrow when interest rates start to rise again, the long term benefits associated with investing in bricks and mortar are likely to ensure that buying will continue to be viewed favourably by many,’ Thiru added.