In a time where financial resilience is more important than ever, renters find themselves grappling with perpetual rental rises that threaten their financial stability. Whilst there’s a massive task that renters face it is possible to bridge the financial gaps through careful planning and step by step action. But renters do need to take action now. We take a look.
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The Hard Truths of Renting
As Sarah Coles, head of personal finance, Hargreaves Lansdown comments: “Rent is such a massive drain on our finances that trying to build anything for the future while meeting monthly rental costs is like trying to run a bath with the plug out. It means the financial resilience of renters is being washed down the plughole”
With the perpetual rise in rental rates, renters are being caught in a continuous cycle of financial drain and in the main simply don’t have the capacity to secure a financial cushion for themselves.
Figures from Zoopla underscore this concern, revealing a sharp 10% rise in rents over a year which now consumes a staggering 28% of renters’ pre-tax earnings.
This suggests a dire need to find a way through to help renters maintain financial stability.
Navigating the Property Owner Mortgage versus Renters Conundrum
The decision between renting a home and taking out a mortgage to buy one is a significant life choice that carries both financial and lifestyle implications.
For many it is a case of financially not being able to afford a deposit or fund a mortgage on a property and therefore renting is the only viable option available.
If there is a financial choice then there are pros and cons to renting vs property ownership. At a very simple level view:
- Pro – Allows individuals to move freely without the commitment and financial burden of home ownership.
- Con – doesn’t provide the potential long-term financial growth that comes with owning a property.
Property Ownership Mortgage
- Pro – gradually building home equity, which can be a form of long-term savings and financial security.
- Con – added responsibilities such as maintenance, repairs, and potentially higher upfront costs.
The right choice depends on an individual’s financial situation, life stage, and personal preferences, making the rent versus mortgage conundrum a deeply personal decision that warrants careful consideration.
A point to pick up though is according to information from the HL Savings & Resilience Barometer, July 2023, household incomes for renters at £30,294 and those holding a mortgage at £56,188, which clearly shows the uphill battle renters face.
Creating a Roadmap and Financial Goals
In order to move to be in a better financial position, renters need to look to reduce their high-interest debts as a priority. By doing this it means less of your hard earned income will be used on expensive interest payments.
Make sure you look at what protection you have for yourself and your family too. How much life insurance or sick pay for example do you have with your employer?
Next step is to gradually build a financial buffer by reducing unnecessary expenditures and focusing on essential protection measures such as insurance and emergency savings.
Table 3: Steps to Financial Resilience
|1||Debt Reduction||Prioritise paying off high-interest debts to save on interest payments|
|2||Protection||Ensure adequate life insurance and other provisions such as sick pay through employers. Consider your own protection too.|
|3||Emergency Savings||Establish a savings account with 3-6 months of essential expenses|
If you can save even a small amount each month, however much of a challenge this is, it will put you in a much better position should you bit with something unexpected.
Sarah Coles further advises that ‘As a general rule, people of working age should have cash to cover 3-6 months’ worth of essential expenses, kept in an easy access savings account’.
Consider Lifestyle Type Changes to Save Money
In our search to find ways to cut costs, whether to help with our financial position during tough times, or as part of our move to a greener way of living, simple changes can make a big difference.
For example, swapping food items, buying second-hand goods online, and finding new uses for old items can all help and are all growing in popularity. Using clever apps to reduce food waste is also becoming popular.
These habits not only help us save money and reduce waste but also bring people together and spark creativity.
You can find more on this in our article ‘4 Steps Towards a Sustainable Lifestyle: Swap, Share, Upcycle and Save Money‘.
Look To the Future: Pension and Savings
Renters need to be mindful of their future needs, considering their pensions and savings. Retirement might feel like a long way away but cutting pension payments even in your younger will eventually hit you when you do decide to retire.
Using tools such as pension calculators to help you understand where you are in relation to your saving for your pension income needs and helping you stay on track can be very helpful.
Taking the opportunity to increase contributions when possible, for example when receiving a pay increase, bonus or a salary increase as a result of a job change is important too – and do so before you get used to living on the extra money now.
Renters: A Lifeline with Lifetime ISA
In the race against time to save for a house deposit, the Lifetime ISA is a viable avenue for renters aged between 18-39. Offering a government bonus of 25% on contributions up to £4,000 each tax year, it serves as a substantial incentive for potential homeowners, despite the penalty (25%) on withdrawals if the money is withdrawn for anything other than a first home purchase or retirement post the age of 60.
Table 4: Lifetime ISA Details
|Annual Contribution Limit||£4,000|
|Usage||First home purchase or retirement post 60|
|Penalty||25% on withdrawals for other purposes|
Create a Comprehensive Budget
Create a comprehensive budget so you are very clear on all the money you have coming in and what you have going out, what you’re spending.
You should start by writing down all your outgoings; these include rent or mortgage payments, bills, transport, groceries, loan repayments, phone calls, and direct debits.
Once you have down all your outgoings your can then take this away from your net income, if the sum ends up in the minuses then you will need to cut back on something in your budget until things work out.
Clearly having created it you’ll need to ensure you manage your budget closely so that you can take action if and when you see issues arising.