Renting IS cheaper than buying a house with a 5% deposit – and key first-time buyer scheme could work out more expensive

RENTING is cheaper than buying a house with a 5% deposit, a property firm has revealed.

Budding buyers with a 5% deposit face paying £300 per month more in mortgage repayments than if they continued renting, according to Hamptons.

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When interest rates were at lower levels, most would-be owners with a 10% or 5% deposit found mortgage payments comparable to, or less than, their current rent.

This enabled new homeowners to build up equity –  how much of your home that you own – at no additional monthly cost.

But prospective buyers now face mortgage repayments averaging hundreds of pounds more per month than renting the same home.

This comes despite the rising cost of renting, with annual rental growth averaging around 7% across Great Britain each month this year. 

Hamptons said that while buying allows the owner to build up equity, particularly when prices are rising, most tenants would struggle to find the additional cash needed to afford a mortgage.

According to Bank of England data, the average mortgage rate offered to a would-be buyer with a 5% deposit currently stands at 6.1%. 

Nationally, this rate would have to fall to around 4.2% to make the monthly cost of renting and buying with a 5% deposit similar. 

The average two-year fixed residential mortgage rate currently stands at 5.97%, according to Moneyfacts.

Meanwhile, the average five-year fixed residential mortgage rate today is 5.53%.

While there is support out their for first-time buyers, Hamptons said the government’s current mortgage guarantee scheme is struggling to help renters become homeowners when interest rates are high.

The scheme was introduced in 2021 and is available for first-time buyers who have a minimum 5% deposit.

It can be used to buy any type of home so long as you don’t pay more than £600,000 for it.

By providing a guarantee that the government will cover some of a lender’s losses if a borrower can’t afford to repay their mortgage and the home is repossessed – more lenders are prepared to lend up to 95%.

But high interest rates meant that mortgage guarantees in 2023 ran at just 35% of the 2022 average, with completions currently around 15% of the level that the Help to Buy scheme achieved.

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Hamptons also found that completions using the mortgage guarantee scheme are typically concentrated in the north of England, where affordability is less stretched. 

The latest government figures, which run to the end of 2023, show that the scheme has guaranteed three times more mortgages in the North West than in London.

Aneisha Beveridge, head of research at Hamptons, said: “High mortgage rates have squeezed buyers with small deposits out of the market, forcing more households to rent for longer.”

She said that despite political parties’ General Election pledges around low deposit mortgage deals “their effectiveness will probably be determined by interest rates, rather than Downing Street.

“The extent to which the Bank of England reduces rates will shape the numbers of would-be buyers with small deposits more than the best-designed government policy.”

Interest rates currently stand at 5.25%, with the Bank of England expected to keep the rate the same when it meets on Thursday and not lower it until August or September.

While the housing market may seem daunting, it is possible for first-time buyers to make their hard-earned cash go further and secure a mortgage they can afford to repay.

Below is a list of schemes that are available to help wanna homeowners get on the housing ladder.

Different types of mortgages

We break down all you need to know about mortgages and what categories they fall into.

A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.

Your monthly repayments would remain the same for the whole deal period.

There are a few different types of variable mortgages and, as the name suggests, the rates can change.

A tracker mortgage sets your rate a certain percentage above or below an external benchmark.

This is usually the Bank of England base rate or a bank may have its figure.

If the base rate rises, so will your mortgage but if it drops then your monthly repayments will be reduced.

A standard variable rate (SVR) is a default rate offered by banks. You usually revert to this at the end of a fixed deal term, unless you get a new one.

SVRs are generally higher than other types of mortgage, so if you’re on one then you’re likely to be paying more than you need to.

Variable rate mortgages often don’t have exit fees while a fixed rate could do.

The 100% mortgage

That’s why several of the big banks and building societies allow first-time buyers to borrow the full amount it costs to buy their home.

These deals are often referred to as 100% loan-to-value mortgages – because you don’t need any deposit to buy.

But in almost all cases, a family member will need to help out in some way.

Some deals need parents to agree to guarantee repayments, meaning the lender will need to check their income to make sure they can afford to.

The guarantee only kicks in if you can’t make a payment for any reason.

There are also a number of 100% family mortgages – some require a family member or close friend to deposit some savings with the lender for a fixed period.

Others will lend you 100% of the home’s purchase price but will want to take a “charge” on a family member’s home in place of a deposit.

This means that no cash changes hands, but should things go wrong, the lender will be able to get their money back from your relative.

Before that happens, your home would be sold and any money you still owed the lender would be taken from your family member’s home.

Either they would have to borrow money to pay back the lender, or they would, in the worst-case scenario, have to sell to cover any remaining debt.

There is a very serious warning that comes with taking a 100% mortgage.

If house prices fall, you could end up owing the bank more than your home is worth.

That only matters if you need to sell, or when you need to remortgage to a different lender.

But it can cause a major headache.

First Homes

If you’re a first-time buyer, you may be able buy a home for between 30% and 50% less than its market value through the government’s First Homes scheme.

You can buy a new build home from a developer or a property from someone who’s used the scheme before and is now selling.

The First Homes scheme is only available in England and to qualify you have to be 18 or older and a first-time buyer.

You’ll need to be able to get a mortgage for at least half the price of the home.

And you’ll only be able to use the scheme if your total household income is £80,000 or less.

If you’re in London, buyers’ joint income can be a maximum of £90,000.

Shared ownership

You can buy a home through the shared ownership scheme if you can’t afford all of the deposit and mortgage payments for a home that meets your needs.

You buy a share of the property and pay rent to a landlord on the rest.

England, Scotland, Northern Ireland and Wales all have slightly different rules, so check the details carefully.

You can buy a share between 10% and 75% of the home’s full market value and pay rent to the landlord on the rest.

There may also be ground rent and service charges to help maintain common areas shared between you and your neighbours, so factor these in.

You can take out a mortgage to buy your share or pay for it with savings.

You’ll also need to pay a deposit, usually between 5% and 10% of the share you’re buying.

You can buy more of the home later on, when you can afford to.

You’ll pay less rent to the landlord whose share will get smaller.

But watch out for the small print as sometimes you can only buy more of your home in £10,000 chunks.

You’re restricted to buying a new build or from a seller who also bought through shared ownership.

If you have a long-term disability, you may also be able to buy a home that suits your needs such as a ground floor flat.

Another thing you need to consider is that all shared ownership properties are leasehold.

You must check that your ground rents and service charges won’t be put up more than a fixed percentage plus or at the inflation rate.

Lifetime Isa

If you’re saving for a deposit to buy your first home then saving into a Lifetime Isa is a no brainer.

You can save up to £4,000 a year into it and the government will give you a free bonus worth 25% of whatever you save.

If you save the full allowance, that means you’ll get £1,000 a year, every year, for free from the government.

You have to be between 18 and 39 to open a Lisa and you can pay in and get the bonus until you’re 50.

You can have a cash or investment Lisa.

If you withdraw your money before you’re 60, it must be spent on buying your first home.

If you withdraw it for another reason, you will have to pay back 25% of your savings to the government.

Effectively you’re giving back the bonuses.

Help to Build

If you’ve decided to build a new home, you could be eligible to get a Help to Build equity loan from the government.

There are different rules in England, Wales and Scotland so check what’s available for you.

If you’re building a home in Northern Ireland you don’t have access to the scheme.

If you qualify, you can apply for the Help to Build equity loan to pay for land to build on or if you plan to build a new flat on top of an existing building.

If you buy a commercial property and convert it into a home you can also apply and when you knock a property down and build a new home in its place.

You can borrow between 5% and 20% of the land and building costs but you must be able to get a mortgage as well.

Buying the land and the estimated building costs must not be more than £600,000 with building costs capped at £400,000

You can only get an equity loan if you also have a mortgage offer for the home you want to build.

There’s a £1 monthly fee to Homes England to manage the loan and you’ll be charged yearly interest at 1.75% interest after five years.

After six years the amount of interest you pay will go up in line with the consumer price index, plus 2%.

Paying interest does not count towards paying back the equity loan.

Help to Buy – Wales

Help to Buy has ended in England but there is still a scheme in Wales.

You can apply for an equity loan from the government to buy a new build home from a registered builder.

You’ll have to put down at 5% deposit, can borrow up to 20% from the government and get a repayment mortgage for the rest of the purchase price.

Right to Buy

This scheme was famously brought in during the 1980s by then Prime Minister Maggie Thatcher.

It’s still running today and allows most council tenants the right to buy their council house at a discount.

There are different rules for Wales, Scotland and Northern Ireland.

You can make a joint application with up to three family members who’ve lived with you for the past 12 months.

If you rent from a Housing Association you may also have the right to buy it at a discount under the government’s Right to Acquire Scheme.

Deposit Unlock

This lets you buy a new build home from any developer registered with the scheme so long as you have a 5% deposit.

Nationwide and Accord Mortgages are the only lenders signed up to Deposit Unlock at the moment.

The scheme is only available if you apply through a mortgage broker.

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