Assetz® News - The balance of renting and buying

The balance of renting and buying

18th February 2009 |

Over recent years, the issue for people seeking a home has often revolved around a particular question: Is it better to rent or to buy?

The answer to this has not always been straightforward. One issue has been money, with affordability a problem in many areas and large numbers of people seeking to utilise the growing supply of buy-to-let facilities in order to provide an alternative to prices that are out of reach.

Of course, other factors may apply as well. Some buy-to-let accommodation is for students, whose finite period of time in one location for a specific purpose means renting a room (assuming their college is away from their home town) is the most practical solution. The same may apply to those living in a location for a short time while working on a temporary contract.

Where the issue of cost has been a compelling reason to rent in the past, new research from Abbey has suggested things may be changing. A study by the lender has concluded that for those who can afford a 25 per cent deposit, it is now cheaper to buy than rent in most parts of Britain as mortgages have fallen. On average, the bank concluded, first-time buyers can save up to £1,000 a year this way, with the biggest monthly average saving being enjoyed in the north-west.

For investors in rental property, this may require some adjustments, either in cutting rents or targeting those sectors of the market where demand will stay highest. While Abbey's figures may look like good news for first-time buyers, the fact that they are based on 25 per cent deposits means that for many people such benefits will remain out of reach. Areas where this is the case for most could therefore remain fertile territory.

In addition to this, Abbey also noted that in London and East Anglia renting remains a cheaper option, which could be good news for investors there.

The situation with mortgages may be a fluid one for now, but with less scope for change in the future. Minutes of the Bank of England's monetary policy committee (MPC) meeting for February, which were published today, showed that as in January eight members had supported a 0.5 per cent cut, while David Blanchflower had again sought a one per cent reduction. This vote brought the base rate to a new record low of one per cent and given the identical nature of the last two votes, it may be suggested that another cut may occur in March, something that could help lower mortgage prices.

However, with the rate having little scope left for further trimming, the potential for mortgage costs to be reduced this way is running out. The minutes noted that the MPC had taken this issue into account- along with the potential profitability problems that may be posed to banks by an extremely low base rate - suggesting that further monetary easing may involve a different instrument; that of supplying more money through asset purchases.

So while deposits remain high and the scope for more mortgage cuts is narrowing, it may well be that for those investing in buy-to-let, a great many of their customers will still find renting the more viable financial option, as well as - depending on their circumstances - a more practical one for some.