First-Time Buyers May Save Money by Renting in London, Analysis Finds

First-time buyers in London could be financially worse off by £23,491 in their first year of homeownership compared to continuing to rent, according to an analysis by mortgage broker Tembo. In contrast, buyers in cities such as Belfast, Newcastle, and Glasgow could see a financial gain of over £12,000 in their first year of owning a home.

The analysis compared the financial position of someone purchasing a home against someone who continued to rent. A key factor in Tembo's calculation is that the potential buyer in the scenario invested their deposit for the extra year they continued renting, earning an average rate of return. If the deposit had been held in a low-interest savings account instead of being invested, the financial outcome would almost always favor buying a home sooner.

Tembo's findings consider rental costs, mortgage repayments, built-up equity, projected house price changes, stamp duty, and investment returns on the deposit. These factors highlight increasingly pronounced regional differences in the financial viability of buying property across Britain, even as homeownership generally remains an effective strategy for building long-term wealth.

Short-Term Financials Vary by Region

In London, the average home costs approximately £553,000, incurring £17,650 in stamp duty for a first-time buyer. With a 10% deposit and a typical mortgage rate of 4.75% over a 25-year term, monthly mortgage payments could reach £2,836, significantly higher than the average London rent of £2,181. This scenario, when factoring in investment returns on the deposit, results in a first-year deficit of £23,491 for the buyer.

Conversely, in Glasgow, where the average property price is £187,000, first-time buyers would not pay stamp duty as the price is below the £300,000 threshold. A 10% deposit and the same mortgage terms would lead to monthly payments of £959, a slight saving compared to the average rent of £1,024. The benefit of buying in such markets is amplified by equity build-up through mortgage repayments and potential house price growth.

Tembo also identified Birmingham as a city where first-time buyers might incur a small loss in the first year of ownership compared to renting and investing their deposit, with a difference of £308. However, in many northern cities, more affordable house prices allow buyers to build equity from the outset while benefiting from price appreciation and avoiding rent increases. In contrast, larger deposits, higher stamp duty, and increased mortgage costs in the South have diminished early financial advantages, making property acquisition less compelling in the short term in some southern areas.

Long-Term Wealth Creation Through Homeownership

Despite the short-term financial disparities, homeownership generally leads to greater long-term wealth accumulation across most of Britain. Over a five-year period, buying a home builds substantial wealth compared to renting. This benefit ranges from £87,291 in Northern Ireland, Wales, and Scotland, to £47,221 in central England. In the South of England, owning a home offers an estimated £58,141 financial benefit after five years.

London remains the only analyzed city where ownership does not yield a positive return after five years, with owners projected to be £11,854 worse off than if they had rented. Paul Elcino, director of mortgages at Tembo, emphasizes that homeownership remains a primary driver of long-term wealth creation, stating, "The old advice still holds up: time in the market beats trying to time the market."

Market Conditions and Affordability

Affordability metrics have worsened across the board due to rising interest rates and house prices. Between April and June, the average first-time buyer deposit increased by £3,000 to £45,000, extending the time needed to save for a deposit to an average of 11.3 years. Mortgage rates also climbed, with the average first-time buyer rate moving from 4.48% to 4.96%, resulting in an average monthly increase of £51.

Despite affordability challenges, property availability for first-time buyers has surged nationally, with a 17% increase in listed options across the UK. Twenty-one out of 22 analyzed cities saw a rise in properties available for first-time buyers compared to the previous quarter. While London experienced the largest volume increase, regional hubs like Stoke-on-Trent, Glasgow, and Bradford have seen significant percentage growth in available stock. Brighton is noted as the sole exception, with a decrease in listings.