It's been an accepted truth for a while now that buying is cheaper than renting, but new figures from AM Trust International show just how far that gulf is widening. First-time buyers, it could pay to build up that deposit…
Falling rates pay off…
The latest drop in mortgage servicing costs is all thanks to falling mortgage rates, which have meant that the average mortgage interest payments for a first-time buyer (FTB) mortgage over two years fell from £11,327 in the first quarter of 2015 to £10,019 this year, equating to a saving of £1,308.
Essentially, this means that it hasn't been this cheap to service the interest on a 95% loan-to-value (LTV) mortgage since lending at this level was reinvigorated in 2013, the report said, which will "come as welcome news for a group who have been caught by rising house prices and expensive rents".
It also means that, as the interest costs associated with paying off a mortgage have fallen, the amount spent by high-LTV borrowers on capital repayments has increased – in other words, first-time buyers are now paying off more of the loan itself rather than focusing on interest payments, allowing them to build up equity in their home more quickly.
Indeed, the amount spent on capital repayments has risen by 18% in the last year, up from £5,407 at the start of 2015 to £6,391 in 2016. This means that borrowers will be able to pay off the capital of their mortgage quicker, which in turn can reduce the amount of interest paid over the lifetime of the mortgage.
… but renters get another blow
However, while it's all good news for buyers, it's not so great for renters, with the cost of renting having risen sharply over the same period – typical rent costs are now £300 (or 3%) higher than they were a year ago, up from an average of £9,188 in Q1 2015 to £9,488 in Q1 2016.
This means that, when including the full mortgage payment (interest and capital repayment), the cost of paying a mortgage is now £1,282 cheaper per year than renting (£8,206 vs. £9,488).
"There is a large and rapidly growing gulf in the cost of housing that favours first-time buyers over renters, providing they can get a foot on the ladder," said Simon Crone of AmTrust International, Mortgage and Special Risks. "Record low interest rates mean that those lucky enough to buy their own property are benefitting from lower payments, while rental costs continue to rise, penalising those unable to save enough for a deposit."
As a result of such high rental costs, many first-time buyers are unable to save large deposits, and are therefore reliant on being able to access high-LTV mortgages. "It is therefore vital that we have a strong, sustainable supply of high loan-to-value lending to support those with smaller deposits who want to buy a home," added Simon.
"Government intervention in the form of the Help to Buy mortgage guarantee scheme fired the starting gun on the return of high-LTV lending, [and] the competition between lenders we have seen since the scheme was introduced has pushed down rates on 95% LTV mortgages. However, the Help to Buy scheme will close at the end of the year, and it is concerning to see signs that high-LTV lending is on the wane."
He added that high-LTV lending now faces an added threat following the referendum result, as lenders are likely to become more risk averse and could cut back their high-LTV offerings as a result. However, this is still just speculation, and for the time being the market remains in a strong position to support first-time buyers – so get on board!
It may be difficult to save up for that deposit, but with only 5% required, it'll hopefully make it slightly easier. Take a look at our first-time mortgage best buys to get an idea of the kind of deal you'll be saving up for.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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