A shifting economic landscape has made it increasingly difficult for potential buyers to decide if and when to take the plunge. This is especially true in areas of stretched affordability like London. While first-time buyer (FTB) numbers have remained much more resilient in the first half of 2023 than we previously anticipated, the hikes to interest rates and wider cost of living pressures have taken their toll. What do housing options look like in this context?

Size of deposit is key

The most suitable option will greatly depend on personal circumstances and housing need. For would-be buyers in London, the key barrier is getting a deposit together. The average FTB deposit in the capital currently stands at 35 per cent of the property value, compared to the UK figure of 25 per cent. This is accompanied by higher capital values, which meant that in the first half of 2023 the average FTB deposit was over £105,000 more than in the wider UK. Those lucky enough to call on the Bank of Mum and Dad have a significant advantage. 

Buying vs renting

We can calculate the monthly savings for a typical FTB, with an average property in London of £500,000, deposit of 35 per cent, on a 30-year mortgage term and rate of a five-year fix at 5.27 per cent. This would amount to monthly mortgage costs of around £1,800. In contrast, the average rent in Q2 2023 for a two bedroom flat in London was over £2,050, according to Rightmove, a difference of more than £250. Buyers can also improve monthly affordability by extending their mortgage term. Increasing this to 33 years would reduce monthly mortgage costs by a further £60.

Even with the substantial recent increase in the cost of debt, buying remains a potentially cost-effective option. This is on top of the benefits of security and building equity that come with buying. Mortgage rates have also begun to fall from their peak, which will improve affordability. 

For those with smaller deposits, the balance can tip the other way to make renting more cost effective. A drop in the deposit to 25 per cent in the above scenario would mean monthly mortgage costs match the average rent. Potential buyers may also be renting a one-bed flat, with the average monthly cost of just over £1,600 according to Rightmove. Londoners may also prefer to rent for a number of reasons, including the flexibility to move, adapt to the changing economic environment, and the potential to live closer to places of work in the city centre. 

For those without a large deposit 

The rise in mortgage rates uncovers a third option which has become increasingly more attractive, especially since the end of the Government’s Help to Buy scheme: Shared Ownership. This alternative helps overcome the hurdles of getting a large deposit together as buyers purchase a share of a property while paying a regulated rent on the rest. 

We can use the same scenario above but with the shared ownership mortgage rate of 5.89 per cent. Purchasing a 40 per cent share with a 5 per cent deposit costs around the same per month as buying outright with a 35 per cent deposit. Meanwhile, a 25 per cent share is a similar monthly cost to renting a median one-bed property. Even with the increase in mortgage rates, this remains an affordable option on a monthly basis and provides benefits that come with ownership, without the need for a substantial cash deposit. 

Whether buying or renting, it is up to individuals to assess their circumstances and decide what is best for them. The different housing options explored here can cater to different people with different needs and financial situations. 

Further information

Contact Toby Parsloe or Sophie Tonge