Why the only real ‘rent freedom’ is when you buy
This year on 16 April, the UK’s homeowners could breathe a small sigh of relief. It was ‘Mortgage Freedom Day’, the day by which the average homeowner has earned enough to make a year’s repayments on the average mortgage. It’s shocking enough that it takes nearly a third of the year to pay just for a place to live – yet homeowners at least have the consolation of knowing that much of their money is going into the long-term investment of a property. Unfortunately, if you rent your home, you have no such consolation. The money disappears into your landlord’s pocket – and to add insult to injury, you pay even more than the homebuyer.
How do we know when Rent Freedom Day falls?
Based on average UK wages and the average rent on homes in the UK, a full-time worker living alone would have made enough money to pay a whole year’s rent by 3 May (after tax and National Insurance). However, the figures fluctuate around the country – according to data from the BBC, some regions achieve ‘rent freedom’ by the end of March, whereas in areas with the highest rent-to-earnings ratio (such as London) it might not arrive until September or even October. Most people who rent their homes in the more expensive areas are of course sharing a property with several others, as this is the only way their earnings can hope to meet the cost of the rent.
Many areas of the country have seen Rent Freedom Day come later each year, meaning that the gap between their earnings and their rent has increased. London, the East and the South East have seen the biggest increase in this gap, though it has fallen significantly in the North and in Wales, and to some extent in Scotland too.
With rents in the UK averaging around £920 per month, renters are effectively losing over £11,000 per year – at least a portion of which could have been retained as a long-term investment, if they were buying a property via a mortgage. Furthermore, this monthly rent is roughly equal to mortgage repayments on a loan of £190,000. This figure would suggest that the average renter (or group of renters) could – in theory anyway – afford to buy a property worth over £200,000. So what’s stopping them?
Easier ways to buy a home
Clearly, if it was as simple as swapping rental payments for mortgage repayments, a lot more people would own their own homes. There are two main obstacles that prevent renters from making this switch.
The first is the difficulty of raising a large enough deposit. The majority of mortgages require at least a 20 per cent deposit, so for the average UK home price (£226,000) you might need to save up £45,000. For many, this sum is simply unachievable in the short or even medium term – and of course it’s much harder to save if you have to throw away money on rent every month.
Fortunately there are ways around this problem. It is possible to obtain mortgages with a lower deposit (as little as 5 per cent, or around £11,300 for the average home) which is much more doable. The terms of such mortgage deals will be less favourable, so the mortgage will cost you more in the long term – but it will still be less costly than renting.
Other practical solutions include:
Guarantor mortgages and other family-assisted mortgages
You can obtain a mortgage with no deposit if your parents are willing to help out. There are a number of ways to buy a home via the Bank of Mum and Dad – such as a guarantor mortgage (where your parents guarantee the loan), a family deposit mortgage (where the deposit is equity from your parents home) or a family offset mortgage (where the deposit is a savings account held by your parents). Follow the link above to find out more about these options.
New build loans
Some new-build property developers will lend you the money for a deposit, to be repaid over the course of 15 years. You’ll need to be able to afford this on top of your mortgage repayments.
The government’s Help-to-buy scheme allows first-time buyers to put down a 5 per cent deposit and take out a 75 per cent mortgage (which is better value than a 95 per cent mortgage) and make up the difference with an equity loan of 20 per cent (so the government will start by owning 20 per cent of your property). You can then pay down your equity loan over time until you own that portion outright. The drawback is that the equity value is based on your property’s value, so if the price of your home goes up, you will have to pay back more.
Yet another option is to buy a portion of a property and rent the rest. This is known as shared ownership, and is available through numerous schemes. For example, if you start by buying 25 per cent, you will only need a quarter of the size of the deposit you would have needed for the whole property (and a smaller mortgage too). You then pay off your mortgage, while paying rent on the other 75 per cent. You can ‘staircase up’ (buy out larger shares of your property) later on if you wish, once you have saved more money.
For all the above solutions, also bear in mind that if you have a spare room in your property, you can let it out to help you meet your mortgage and/or loan repayments.
Another solution: ‘Tenants-in-common’
The second main obstacle preventing you from buying may be even simpler. It’s common to rent a property with a group of flatmates or housemates, which greatly reduces the cost per head. Buying, on the other hand, is something people tend do on their own or as part of a couple. So if you can’t afford to buy alone and haven’t yet met ‘the one’, does this rule out home ownership for you?
Not necessarily. Many don’t realise that it’s possible to buy a home as part of a larger group. Up to four people can buy a home together under an arrangement known as ‘tenants in common’. In this set-up, each person buys a share (not necessarily an equal share) at the start, depending on how much they are able to contribute to the deposit and mortgage. People are free to move out simply by selling their share to someone else (either one of the existing tenants-in-common or a replacement). There are risks, of course – if one tenant can’t keep up their mortgage repayments, the others must bear the cost or face repossession. You also can’t sell the whole property unless all of you agree. Nevertheless, if you have up to three good friends who are in a similar predicament to you, tenants-in-common may be a way for all of you to escape from the rental black hole.
Why home ownership is worth the effort
Despite a long period of low interest rates, it’s never been so difficult to buy a home in the UK. On the other hand, it’s never been so expensive to rent one either. And when you compare the rental freedom date with the mortgage freedom date, and consider that money paid in rent is gone for good, it’s clear that home ownership is hugely preferable, and still worth the struggle to achieve. Furthermore, owning a home at last will enable you to take better control of your overall finances, save more in the long term, and provide greater security for you as you grow older.
A good mortgage broker can tell you if home ownership may be within your reach, and how to bring it closer. Find one today.
Let us match you to your
perfect mortgage adviser