With over half their income going on rent, should Londoners buy instead?

Londoners spend an average of up to 61 per cent on of their income on rent

On average, people living in London spend over half of the income on rent, with those in Camden paying out the most, at around 61%1. It is thought that first-time buyers making a concerted effort to get onto the property ladder along with ‘second steppers’ moving up to the  next rung of the property market have helped to make the market for rental properties less appetising for landlords, as have the revised buy-to-let tax rules. With all this aggregated pressure on the market, there are fewer rental properties for tenants to choose from and the costs of renting have inevitably climbed.

There are, of course, significant variations throughout the London boroughs in the percentage of income spent on rent and it should be noted that although the largest percentage of income being spent on rent is in Camden, it does not mean that Camden is the most expensive place to live in London. It is just that rent eats up more of what tenants earn in that particular borough. At the other end of the scale, people in Kingston upon Thames fare a lot better, with tenants only spending an average of 25% of their income on rent.

Percentage of monthly gross salary spent on rent in different London boroughs

Percentage of monthly gross salary spent on rent in different London boroughs

Should I buy or rent?

Of course, there are pros on cons with buying a property as opposed to merely renting a place. The benefits include that once you have finally paid off your mortgage you will have a valuable asset and of course, your outgoings will be significantly reduced. What is more, a home is generally an appreciating asset, that could help you fund a better home in the future, or even help pay for your retirement if you decide to downsize.

On the other hand, if interest rates go up, so will your monthly repayments (unless you have chosen a fixed-rate mortgage). Depending on the state of the housing market, it may take time to move if you suddenly decide you want or need to relocate. Also, general maintenance will now be at your expense rather than paid for by your landlord. There is also the risk of the value of your property falling, leaving you with a home that is worth less than what you owe on your mortgage, a position known as ‘negative equity’.

For many, the stability that can come from owning your own home rather than just being a tenant is worth the effort needed to get a deposit together, but for many, it will all come down to one question.

Can you afford to buy a home?

If you decide the ‘pros’ outweigh the ‘cons’ of property ownership, you need to work out if you can afford to buy a home. Note, you will need to put down a deposit (often 10% of the value of the home is needed although it might be possible to find a ‘95%’ mortgage), find the cost of a survey, pay the Stamp Duty (this no longer applies to first-time buyers paying £300,000 or less for a residential property) and cover the legal costs associated with buying the property.

As highlighted above, you will need to put together a deposit to put down on the property. Try not to be too alarmed at the amount of money you may need for this as, depending on your circumstances, you could qualify for valuable help.

Now may actually be a good time to buy

Although there have been many reports of London house prices falling throughout 2018, they have only actually fallen by an average of 0.1%2. However, the fact that this is only the second time in over two decades that London has ended the year in negative growth makes this small dip in prices significant2.

What is more, this has done hardly anything to improve affordability, with the earnings ratio currently at 13.3x, down from a peak of 14x back in 2016. Looking on the positive side for potential buyers, at least house prices in the capital have not continued to grow even further out of reach for the average Londoner.

How to gain help with buying your home

If you are a first-time buyer, a social housing tenant, a key worker, on a low income or only have a small savings ‘pot’ to draw on to use as a deposit, you may be able to take advantage of various housing schemes that the UK government has put in place:

1. Homes for Londoners

With this scheme, people on low-modest incomes can buy or rent a home at an affordable price. If you’re looking to buy a place, it works by enabling the borrower to partly buy and partly rent a home, which usually must be a new-build although some older properties are available.

To access the scheme, you’ll need to meet various criteria (including earnings) and you will need to register at the Mayor of London/London Assembly site. The site includes a useful property search tool and ‘eligibility checker’.

2. Help to Buy scheme

If you can only afford to muster a small deposit, you may qualify for the Help to Buy scheme. It is available exclusively to first-time buyers and existing homeowners looking to buy a new build house (a property that has just been built rather than one that has already been lived in).

The Help to Buy scheme enables you to borrow up to 20% of the purchase price of the home without paying any interest for the first five years, but you will need to prove your commitment by saving-up a minimum 5% deposit of the purchase price.

Recognising that there are vast variations in house prices across the UK, the price of the maximum price of the home varies, from £437,600 in the South East (including London) to £186,100 in the North East. But you must act fairly quickly, because although the scheme has just been extended, it is due to end in April 2023.

3. Right to Acquire scheme

If you are a housing association tenant who rents your home from your local council, you can use the Right to Acquire/Right to Buy scheme to purchase your home at a discount.

The amount of money you could save will depend on both the type of property you are living in and who your local council is, as each council offers varying discounts.

To qualify for a discount and the right to buy your home, you must have rented from either your local council or a housing association for at least three years. However, although in Scotland the Right to Acquire/Right to Buy scheme ended back in 2016, contact your local council (if you live in Scotland) as they may have an alternative scheme available to you.

If you live in Northern Ireland, the scheme is known as the House Sales Scheme, and will offer a discount on your home if you rent it from a Housing association or the Northern Ireland Executive.

Only you will be able to answer if you should buy or continue renting your property, but if you do decide you should buy your home, discover how a good mortgage broker could help you.

Sources:

1The Metro: https://metro.co.uk/2018/11/23/how-much-of-peoples-salary-is-being-spent-on-rent-in-london-8169612/
2Mortgage Introducer: https://www.mortgageintroducer.com/london-ends-year-negative-growth-second-time-23-years/

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