Mortgage payers could end up up to £350,000 better off over the next 30 years compared to those who rent privately, according to new research.
In what’s described as a ‘homeowner bonus’, the average homeowner could expect to save an average of £133,700 by paying a mortgage instead of paying rent, while the additional £218,000 comes in the form of equity gained over the lifetime of the mortgage. The research also does not factor in house price inflation.
The study from the Intermediary Mortgage Lenders Association (IMLA) reveals that while private renters could spend around £451,600 over the next 30 years, homeowners would pay £317,900 over a 25 year mortgage period if interest rates remain at their current levels. These figures also take into account a projected annual rent increase of 2% per year.
Meanwhile, using the same metrics over a period of 30 years, the difference in expenditure between a homeowner and a private renter would be £133,700 in favour of homeowners. When adding the accumulation of equity, the average homeowner could be £352,500 better off over the next 30 years than if they were to rent the average privately rented property, without factoring in any potential increases in house prices.
The benefits then continue beyond 30 years, as the mortgage would have been paid off by that point, whereas a renter would have to continue to pay a landlord throughout retirement. The IMLA also points out that the financial advantages of homeownership could be even greater than their own research suggests if house prices continue to inflate further.
The report also reveals that mortgage payers would have to be paying in excess of 11.5% interest over the lifetime of their deal to lose all the financial benefit of home ownership. This is far beyond even current stress testing which lenders have to conduct when assessing borrower affordability.
The research suggests that strict criteria that must be met by borrowers before lenders will grant them a mortgage is the biggest hurdle faced by first time buyers – not rising house prices. Since the financial crisis, many consumers have been prevented from getting onto the ladder, while those who have been successful have faced tighter regulations which has limited their options.
It points out that the marginalisation of higher loan to value loans meant that buyers had to make significantly larger deposits, unachievable for many without help from friends or family. Low interest rates ensured have ensured that the repayments remain affordable once the loan is secured.
‘Becoming a homeowner is a life changing experience. It can also transform your long term finances and this research quantifies the extent of that transformation. The long term benefits of being a homeowner are not just confined to the property value and the potential for house prices to increase. Home owners also potentially save hundreds of thousands of pounds compared to their private renter counterparts,’ said Kate Davies, IMLA executive director.
‘Despite the financial benefits of buying a house, there has been a marked decline in home ownership amongst younger people. This is not only due to the rise in house prices relative to income. Reduced mortgage availability after the financial crisis, and the need for buyers to find higher deposits, caused a sharp fall in the number of first time buyers,’ she explained.
‘The overlay of stricter affordability criteria introduced into the mortgage rules has added to the problems faced by potential buyers trying to get on the ladder. People who have been renting privately and comfortably making their monthly payments are struggling to obtain a mortgage with the same or even lower monthly payments, while the near disappearance of interest only as a route to managing affordability has cut the number of options for first time buyers,’ she added.
The IMLA is urging the government to subject the current regulatory regime for mortgages to an independent cost benefit analysis to assess whether some consumers are effectively excluded from homeownership as a result of the current regulations.
‘This research identifies some very interesting statistics and we think that now would be a good time for the Government to take stock and assess whether current mortgage regulation is working as intended. A cost benefit analysis which takes account of the long term costs to consumers of not being able to buy a home of their own would hopefully indicate whether taking a more holistic approach, which considers the costs to consumers of not buying, would justify changes to the current regulatory position,’ said Davies.
‘Whilst this report highlights a stark difference in the long term financial position of those who buy as against those who rent, it also underlines the importance of a continuing and healthy private sector for those who are renting, whether they need to rent long term or are saving up to buy their own homes,’ she explained.
‘The PRS continues to play a vital role in Britain’s housing market as well and IMLA will continue to champion the need for a vibrant and competitive sector which provides homes for millions of people who need or want to rent. But we do think it is important that the Financial Conduct Authority and the Bank of England should acknowledge and take account of the financial situation for those who cannot buy or enter social housing when implementing rules in the mortgage market,’ she concluded.