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Given London’s high property prices and stretched affordability among those trying to climb on to the housing ladder, you might think that Generation Rent have given up their dreams of homeownership. But this is not the case. The aspiration to own their own home remains and Government policies such as Help to Buy, which allows buyers to purchase homes with a minimum 5% deposit, supports these ambitions.

We expect that within London the new mortgage guarantee part of Help to Buy, launched this autumn, months ahead of the expected date, will have a greater take up among buyers who are income rich but equity poor. As a result, this may subdue demand for rental homes in the higher mainstream end of the market in certain parts of the capital. Central London areas where there is demand from lifestyle renters such as the transient population of overseas students and corporate tenants, will be less affected.

Help to Buy is of less assistance to those on lower incomes. A five per cent deposit of a large sum is still a large sum. Add to that the associated costs of buying such as Stamp Duty and buyers are still having to save sizeable chunks whilst paying rent and living in what is an expensive city. We expect that the Bank of Mum and Dad will continue to play a big part in the housing market despite Help to Buy.

But those are not the only hurdles. Given the demise of interest-only mortgages and lenders’ requirement for borrowers to pay back both interest and capital on a monthly basis, the cost of servicing debt is higher. This can make buying on a high loan-to-value mortgage more expensive than renting. Furthermore, lenders are applying tough credit checks and stringent stress tests ahead of a likely rise in interest rates.

Once you take in all the costs and banks’ more onerous lending criteria, renting remains significantly cheaper than buying overall. We calculate that an average London property valued at £410,000 would cost about £20,000 to rent a year. But a buyer with a 5% deposit would spend £30,000 a year servicing the mortgage debt and paying off costs associated with homeownership.

First-time buyers

So far, the biggest take up of the equity loan element of Help to Buy, the part aimed at buyers of new build homes which was launched in April, has been outside London. Appetite for the scheme in the capital has been the lowest in the country.

Figures from the Home Builders Federation show that 15,410 reservations for new homes have been made since the scheme was launched in April this year. However, of these only 1099 were in London. In contrast, the Midlands saw the greatest take up with 3,898 reservations, followed by the East and South East where 3,133 deals were made. This suggests that even with the assistance of Help to Buy, London is still out of reach of many first-time buyers – the principal consumers of the scheme so far.

Savills analysis shows that in order to purchase a property at £256,000, the average price paid by first-time buyers in the capital, new buyers are currently putting down deposits of £63,200. Access to Help to Buy reduces that deposit requirement to just £12,800.

However, a smaller down payment means buyers pay a higher mortgage rate on larger capital debt.

The graphic below outlines the sums involved for the mainstream market segments discussed in this document. The calculations for buying with a 5% deposit, assume a mortgage rate of 4.99%, which is typical of high loan-to-value deals. For deposits of 25%, we have a assumed a lower rate of 3.99%, reflecting the current mortgage market.

This translates into bigger monthly payments. Assuming a 3.5 times income multiple, we calculate that as a result first-time buyers relying on Help to Buy must be earning an average income of £54,000 a year compared with the current average income of a first-time buyer in London which is £52,000.

Reality check

A survey by Rightmove of 3,200 Londoners, including owner occupiers, renters and those living with their parents, emphasizes homeownership as the tenure of choice. Rightmove found 96% of those not on the ladder dream of owning their home one day and 69% said they would never stop trying. However, that ambition is unlikely to be realised by all. Although 57% are currently saving for a deposit, of those only 19% feel they are on course to meet their goal.

Savills exclusive survey of tenants by YouGov shows lack of deposit remains the chief reason for renting although the inability to meet lending criteria and meet monthly repayments also plays a part. However, in higher income bands the convenience of renting as a short term solution is a significant factor.

Decisions, decisions

Those in a position to choose whether to buy or rent, face the option of either buying sooner with a smaller deposit and paying more for their property or saving up for longer in order to put down a larger deposit.

In reality people are seldom likely to buy the homes they rent. There are other factors to weigh up such as property size versus commuting distance and second-hand versus new build which can come at a price premium but offer greater convenience. Life stage is also a factor. Those who rent a two bedroom flat in a central location, may well look to a three bedroom house a bit further out when it comes to buying.

Our YouGov survey reveals tenants prize a convenient location within ten if not five minutes walk away from public transport above all else. Having shops and amenities nearby is also deemed as important.

The research shows that younger tenants do not want to be tied to longer tenancy agreements, emphasising their perception of renting as a short term measure for those still in a position to aspire to homeownership. But this reverses for older tenants. The fastest growing group of tenants are those aged between 35-44. This trend is likely to continue.

Taken from
Spotlight: London Demand