Renters are far behind home buyers in terms of financial wellness

20th May 2016

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A growing number of UK adults are unable to purchase a home, leading them to suffer from poorer levels of financial wellness, according to the first Momentum UK Household Financial Wellness Index.*

The Index, commissioned by Momentum UK and conducted by the University of Bristol’s Personal Finance Research Centre is the first research of its kind to look at the overarching financial wellness of the UK.

The Index revealed that financial wellness is drastically split between homeowners and non-homeowners with renters suffering due to a lack of assets and an inability to plan long-term effectively.

Those with a mortgage average 71/100 Index points, and those who own outright average 74/100.

Meanwhile, those in rental accommodation average financial wellness scores of 62/100, 62/100 and 60/100 points among private renters, Housing Association tenants, and Local Authority renters, respectively.

The lack of significant difference in score between private renters and those in social housing, indicates that, even though they have relatively higher incomes, private renters are being made financially ‘unwell’ by their living situation.

Renters’ day-to-day spending suffers

The Office for National Statistics’ Economic Review estimated that renters generally spend approximately 20 per cent of their income on rent, with this rising to 25 per cent for private renters. This has risen from 10 per cent over the last three decades.

These exorbitant costs are also evidenced in the Index’s findings which found that renters are half as likely as home owners to feel that their income will cover their monthly outgoings. Renters are also half as likely to feel comfortable with their current standard of living. Also, double the amount of renters missed a minimum repayment on a credit card, loan or other debt in the last year.

Renters also are far less prepared to deal with unforeseen money worries – being half as likely to have funds put away for a rainy day and twice as likely to not be able to meet an unexpected major expense without having to borrow money.

Ferdi Van Heerden, CEO, Momentum UK said: “The financial hardships being faced by renters are making it impossible for them to build the deposit necessary to get their foot on the property ladder. Soon we will see a situation where only those who already own or inherit property will be able to own a home.

“Private renting is on the increase from 6% of the population in 1988 to 16% in 2014. By contrast, the prevalence of mortgaged home ownership among under 40’s is lower than in 1977, when the Right to Buy was introduced to address just such an issue.”

The long term effects of renting

Despite the fact that renters are just as likely to budget and monitor their day-to-day spending as home owners, they are far more likely to see their long-term financial prospects suffer due to the effect that renting has on their income.

According to the Index, renters are twice as likely to have no savings, insurance or pension products in place. They are also twice as likely as homeowners to have no provisions in place for their retirement. The long-term reality of living as a renter has also had an effect on the financial confidence of non-homeowners, prompting fears for both their short and long-term financial futures.

Van Heerden adds: “If we do not address the UK’s rental trap, we are effectively creating a lasting social divide between the ‘haves’ and ‘have nots’. We cannot simply assume that the current system will resolve this issue and action must be taken to address this.”

About The Momentum UK Household Financial Wellness Index

The Momentum UK Household Financial Wellness Index brings together macro- and micro-level data to paint a picture of individual and household finances in the UK. The Index runs from a scale of 0 to 100, where higher scores represent greater Financial Wellness. 70 per cent of the Overall Index score is based on a Micro Index, calculated from the results of a UK-wide survey of approximately 2,000 individuals (conducted in late 2015). The remaining 30 per cent consists of a Macro Index that is constructed using the results of three key national economic indicators: the unemployment rate, annual change in GDP per capita, and the Gini coefficient of income inequality. The Overall Index score is calculated by summing the Macro Index results with survey respondents’ individual Micro Index scores. The results are weighted so that they are nationally representative. Financial Wellness is best viewed as a latent construct that is measured indirectly and holistically through a range of measures or indicators.

 

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