A NEW study has found that buying a home in Scotland is now cheaper than renting, with the cost of a mortgage falling because of low interest rates.
Bank of Scotland, which carried out the research, said average monthly mortgage payments for a three-bedroom house in Scotland were £510 in December last year, 6% lower than the monthly rent of £540 for the same type of property.
This is a “significant” reversal of the situation three years ago when the average cost of buying was 47% higher than the average rent paid.
According to the study, the monthly cost of purchasing a home has also fallen by £330 – more than a quarter – compared to four years ago. This has been driven by a 37% decline in the average monthly mortgage payment because of a drop in mortgage rates and house prices.
Nitesh Patel, housing economist at Bank of Scotland, said: “The affordability gains for buyers in Scotland relative to renters in the last three years have been significant, albeit less than the improvement in buyer affordability across the UK. The average mortgage payment has fallen over recent years as a result of falling house prices and mortgage rates.”
However, despite the incentive to buy rather than rent, the number of people purchasing their first home has continued to decline, with first-time buyers struggling to find a deposit or secure a mortgage from banks that are still reluctant to lend.
Dr John Boyle, head of research at estate agents Rettie & Co, said falling interest rates had left many homeowners with money in their pocket as less of their income is now spent on monthly mortgage repayments.
He said: “The cost of renting has not risen that dramatically. Instead, this change reflects the fact that the cost of buying a house has fallen significantly in recent years due to the modest fall in prices, but, largely, due to the fall in mortgage rates. Only 20% of average income in Scotland is now spent on mortgage payments, well down on the long-term average of 30%. The main issue with house buying now is not affordability, but difficulty in accessing mortgage finance due to the drying- up of lending and the size of deposit required. This leaves renting, despite rising costs, as the most viable option for many. However, so far, rental supply is keeping up with demand and this is preventing rents from rising significantly.”
Bank of Scotland estimates there were around 43,000 home purchases with a mortgage in Scotland in 2011. This is the lowest annual total since 1974 and 10% lower than in 2010.
The bank said much of this decline can be attributed to the increase in the size of the deposit required. It also said higher costs related to moving home such as stamp duty and estate agent fees have also added to the overall cost of home buying.
The mortgage rate for a new borrower has been reduced to an average of 3.63% in 2011, from 5.75% in 2008, while the average house price has dropped by 17% over the same period, the Bank of Scotland found.
The current cost of buying a home in Scotland, at £510 per month, is 15% lower than the UK average of £600. Buying is currently most affordable relative to renting in London, with the average borrower paying 10.2% less per month than the typical private tenant.
Michael Luck, managing director of estate agency and letting business Slater Hogg & Howison, said: “High levels of tenant demand have led to increasing rent prices.Renting clearly represents a good short-term arrangement, particularly for first-time buyers looking to raise deposits to secure mortgages.” He said that while there is a debate about the merits of renting over buying, owning property in the long term is “an excellent investment.”