Today’s average homeowner could be better off by £352,500 over the next 30 years, compared to the average private renter, according to new research from the Intermediary Mortgage Lenders Association (IMLA). This ‘homeowner bonus’ includes the £133,700 an average homeowner could expect to save when paying a mortgage rather than rent over that time, as well as the additional £218,000 of equity gained from paying that mortgage off. It assumes no house price inflation.
Kate Davies, Executive Director of the Intermediary Mortgage Lenders Association, said: “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—homeowners also potentially save hundreds of thousands of pounds compared to their private renter counterparts.
“Despite the financial benefits of buying a house, there has been a marked decline in homeownership 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. 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.”
IMLA’s report The Intergenerational Divide in the housing and mortgage markets, has found that while private renters might expect to pay out £451,600 over the next 30 years, taking into account a projected increase of 2% in rent per year, a homeowner on a 25-year repayment mortgage could pay £317,900 if interest rates remain at current levels. Over a thirty-year period, a homeowner would pay £133,700 less than a private renter. 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.1
Beyond 30 years, the homeowner would benefit even further as they would no longer face mortgage payments, whereas someone who was renting would continue to have to do so into and throughout retirement.
The research from IMLA highlights the potential financial disadvantage facing those who do not or who are unable to step onto the housing ladder now, even if house prices don’t increase. Taking into account any house price inflation, the financial advantages of owning a home could be even higher.
The report also reveals that mortgage rates would have to be in excess of 11.5% throughout the life of a loan before owning and renting produced equal expected financial returns. This is far beyond even current stress-testing which lenders have to conduct when assessing borrower affordability.
The research suggests that rising house prices is not the main barrier to first-time buyers. Rather, it suggests that the sharp tightening of mortgage lending criteria in the wake of the financial crisis prevented many consumers from getting on the ladder while the subsequent increase in regulation has limited options for potential buyers to become homeowners. The virtual disappearance of higher loan to value loans meant that buyers had to find much larger deposits – something many found beyond their reach without significant help from family and friends – despite that fact that the prevailing low interest rate has meant that once a loan is in place, it is affordable.
IMLA is calling on the government to commission an independent cost-benefit analysis of the current regulatory regime for mortgages to assess whether current regulations could be contributing to potential consumer detriment by excluding some consumers from homeownership.
1 Based on a homeowner taking out a 25-year repayment mortgage with an average 2-year fixed rate as of June 2019 at 95% Loan-to-Value. The borrower switches to a 90% LTV loan once capital repayments have pushed their LTV below 90% and 75% LTV mortgage rate when their LTV falls below 75% LTV (again using June 2019 rates). This calculation also assumes no increase in house prices. Other cost such as maintenance, repairs and purchase costs have also been taken into account.
Kate Davies, Executive Director of IMLA, comments
“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, and in the interests of UK plc. We therefore suggest that the government commissions 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. Such an analysis 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.
“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. 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 FCA 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.”
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Notes to Editors
The Intermediary Mortgage Lenders Association (IMLA) is the trade association that represents mortgage lenders who lend to UK consumers and businesses via the broker channel. Its membership of 40 banks, building societies and specialist lenders include 16 of the 20 largest UK mortgage lenders (measured by gross lending) and account for about 90% of mortgage lending (89.4% of balances and 90.6% of gross lending).