Buying vs renting: as mortgage rates rise, which is cheaper?

Is now a good time to buy a house or is it better to rent until the housing market calms down? With analysts predicting house prices could fall by 10% or more this year, some buyers might be tempted to wait until the market settles before jumping in to nab a bargain. 

But while house prices are under pressure, rents are also on the rise. 

And while buying property has always been touted as the better option over renting, it’s not always the right course of action for everyone. 

 So, which is the better choice financially – buying or renting? 

The pros and cons of renting  

There are lots of decisions to make when looking at where to live and whether to rent or buy. Some of the positive aspects of renting include the following:

• Flexibility – you’re not tied into a long-term mortgage 
• It is a good option if you don't need to stay in one location or you’re planning to move
• You are not responsible for paying for the general upkeep of the property or fixing things when they go wrong
• You have more money available for other things (if you’re not saving for a house deposit)

The major cons of renting include the following:

• Lack of stability if your landlord decides they want you to move out
• You won’t have the option of decorating (unless your landlord allows it) 
• There might be restrictions on what you can do with the property 
• There is little enforcement in place to protect renters from rogue landlords or unsafe properties
• You may not be allowed a pet

The pros and cons of owning your own home

The decision to rent or buy will usually come down to the costs involved. The positives of being a property owner include:

• You will own the asset when the mortgage is paid off 
• You have more stability than a renter as you won’t have to move out if a landlord decides they want to sell the property    
• You can do what you want to the property, within planning regulations

Some of the downsides of owning a home include:

• You’ll have to pay fees such as stamp duty and legal fees
• You’re tied into a long contract; if you’re unable to pay your mortgage your house could be repossessed
• You may need to buy all your own furniture and white goods
• Owning a house can mean a lot of money is tied up within the property and isn’t readily available for other things, such as supporting children through university or even meeting the rising costs of everyday living
• There are even more costs associated with selling

Is it cheaper to buy or rent?  

It is often argued that it is cheaper to buy a home in the long run. 

The latest data from Halifax shows the monthly cost of owning a house is £971, £41 lower than the cost of renting the equivalent property – a saving of nearly £500 a year. 

But the gap is down significantly from its peak in 2016, when owners were saving £1,567 compared to renters. 

Additionally recent rate changes have made the decision less clear cut for potential owners. 

“Making the move from renting to home ownership can be difficult for many, as raising a sufficient deposit and then finding the right property can be challenging,” says Kim Knnaird, mortgages director at Halifax. 

“While a predicted fall in house prices this year will be welcome news for those looking to buy their first home, it doesn’t change the fact that getting on the property ladder remains expensive – a problem that is compounded when rents are high, impacting the ability to save.”

Michael Webb, managing director at Mortgage Republic Limited, said: “Historical low interest rates, and government intervention in the form of help to buy and stamp duty exemptions had buying as the cheaper option to renting, on a monthly basis, for over a decade.

“Rapidly increased interest rates, without a correction of note in property values, has meant that typically it will now be cheaper to rent than buy.”

Yet buying a house isn’t generally seen as a short-term option and so you’ll need to weigh up the costs over a longer period.

Mortgages are loans. It’s money you owe to the bank and have to pay back, with interest. 

Interest rates have been inching higher over the last year, pushing up the cost for borrowers. Currently they sit at 4%, and markets are pricing in another 0.25% increase when the Bank of England next meets in April, which will filter through to mortgage rates. 

The Office for Budget Responsibility expects rates for outstanding mortgages will reach 3.8% in 2024 before climbing back up to 4.2% in early 2027 – two times higher than what they were at the end of 2021.

But renting is also getting more expensive. Zoopla’s latest Rental Market Report showed the average rent for new lets has increased £117 per month since last year, reaching £1,078 per calendar month. 

Additionally, rental growth is fast outpacing earnings. It currently stands at 12% per year, compared to 6% for earnings. Single earners now use 35% of their income to pay for rent. 

It’s worth considering that rental prices are unlikely to come down any time soon. While Zoopla estimates rental growth will slow to 5% next year, there is still a chronic supply vs demand imbalance. 

The stock of available rental homes is down 38% compared to the five-year average, and down 4% from last November. By contrast, rental enquiries per estate agent’s branch are 46% higher than the five-year average, and rental demand is likely to continue growing as rising mortgage rates delay people’s home-buying plans. 

Is it worth buying a house?

On the surface, the costs associated with buying a house can seem daunting, but for some, they could be worth it, especially if you’re planning to stay in the property for many years. 

It also gives you a certain level of financial security. You know how much you have to pay on the mortgage and at the end of the loan term, the home is yours. 

Additionally data shows currently the market is favouring buyers. Sellers are cutting £14,000 off their asking prices, and discounts to asking prices are larger than in the pre-pandemic years. 

Plus, rents can always go up and if you can’t pay, you could be thrown out. 

Recent rises to mortgage rates have also increased the prices of buy-to-let mortgages and these costs are likely to be filtered down to tenants.

Imogen Sporle, head of regulated and term finance at Finanze, said: “Regarding the very common question I get at the moment of ‘As mortgage rates are going up is it cheaper to rent than get a mortgage?’, my answer to this is a hard ‘no’, and I think it always will be regardless of how high mortgage rates go up. 

“This is because the majority of landlords have mortgages on the properties they are letting out, and although their mortgage payments are slightly lower as they often pay them on an interest-only basis, due to the lender's debt service coverage (DSC) ratio they will still have to increase the rent they charge when the mortgage rates increase.”

Is renting a waste of money?

There is a prevailing view that renting is a waste of money and that it’s better to be paying your own mortgage rather than hand over your hard earned money to a landlord. 

But this ignores the realities of life. 

Some people may prefer the flexibility of renting and not having to deal with the challenges of home ownership. 

Indeed, many wealthy people rent for just that reason. They can walk into a fully-furnished property and don’t have to worry about sorting out a plumber at the weekend if something goes wrong. Then, if they need to fly off, they can. 

Others rent because they can’t afford to buy; there are four million households in the social rented sector in England. 

Some people rent because they don’t know if they want to take on the responsibilities of home ownership – after all, it is a big commitment. 

In the short-term, renting can also make more sense financially.

• Additional contributions from Nicole García Mérida