UK renters bear the brunt of rising housing costs

The extent to which mortgaged UK homeowners on fixed-rate deals have been shielded from rising housing costs over the past decade compared with renters is underlined in new research that warns of tough refinancing conditions over the coming months.

Mortgaged owner-occupiers found their annual housing costs rose by 26 percent in the 10 years to the end of 2022, compared with a 36 percent jump in rental costs for tenants.

Yearly mortgage interest costs fell by 19 percent to £29bn over the decade to 2022, but capital repayment costs rose by 77 percent to £55bn, according to research by estate agent Savills. While interest rates were at ultra-low levels for much of the past decade, UK house prices rose sharply and interest-only mortgages were less common than capital repayment loans.

Focusing on 2022, the researchers found private rented sector, social, and affordable housing tenants paid £93.4bn in rental costs, compared with £84.3bn for the mortgage costs of owner-occupiers. Average mortgage costs for the year were £10,060, compared with £11,689 in average annual rents in the private sector.

Those on fixed-rate mortgages saw their housing costs rise by 1.3 percent between 2021 and 2022, whereas those on variable rates experienced a dramatic 50.2 percent rise.

Chart showing annual UK occupational costs over the past 10 years

Lucian Cook, residential research director at Savills, said: “It shows the extent to which being on a fixed-rate mortgage has insulated homeowners from the rising costs of housing. We know that the increase in mortgage costs hasn’t fully come through because of the number of people on fixed-rate deals.”

Mortgage interest rates on fixed deals hit around 6 percent in October 2022 following Bank of England rate rises and the turmoil of the September “mini” Budget. They have since fallen back to around 4 percent — but remain far above the 1-2 percent deals on offer in 2021.

Many borrowers now face a reckoning as they look to refinance a fixed-rate deal at these higher rates.

The Financial Conduct Authority last week said around 200,000 mortgages had fallen short of payments by June 2022 and a further 45,000 were “financially stretched”, meaning their monthly mortgage payments were above 30 percent of household income. It expects the latter group to grow to 356,000 by June 2024.

On rents, the pressures on tenants were underlined by research from property website Rightmove on Friday, which found 42 per cent of renters in 10 major UK cities were contacting letting agents to move out of city accommodation to cheaper locations on the periphery or beyond, up from 28 per cent in February 2020. Rightmove said rising rents, increased living costs and a lack of available homes to move into lay behind the exodus.

The average rent demanded by landlords on homes in city centres was up 12 per cent on last year, it added, while demand had more than doubled (up 125 per cent) since February 2020. London led the cities where tenants were looking to move further out, followed by Sheffield and Manchester.

Sarah Bush, head of lettings at estate agent Cheffins in Cambridge, said as rents rise, tenants were looking to let what they could afford, rather than holding out for a property in the right location. “Families who need to rent properties with three or four bedrooms often have to turn to village properties simply to get the space they need at an affordable level.”

This week’s Budget had little to offer renters, first-time buyers or mortgaged property owners struggling with higher housing costs. The Office for Budget Responsibility forecast that inflation would fall to 2.9 per cent by the end of this year, which may lead to further interest rate easing for mortgage borrowers. But the peak demand for mortgage refinancing is due over the next two quarters.

“There is going to be further upward pressure on housing costs in 2023,” said Cook. “That means housing affordability is probably going to become more of a political issue, as we approach the next general election.”

The research by Savills combined data from official sources including the Office for National Statistics, the Bank of England, the English Housing Survey, and the 2021 Census. It looked at mortgage capital and interest, and rents, as the chief components of housing costs, but did not incorporate utility bills, taxes, or other payments.

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