Saving for your first deposit while renting can be difficult – even with the help of Government-backed schemes such as the Help to Buy ISA and Lifetime ISA (LISA). With soaring houses, getting a foot on the housing ladder is becoming increasingly tough. It is therefore unsurprising that some tenants have turned to alterative schemes that promise to help them secure a property of their own.
Rent to buy schemes give tenants the right to buy a property after a number of years. A typical scheme will offer an opportunity to buy at the 5 year mark, followed by a further opportunity to buy at 10 years. The price of the house is sometimes agreed at the outset and may not be a fair valuation.
Many of the rent to buy schemes are entirely unregulated and very risky. For example, some schemes require that tenants pay a sum on top of their rent towards the house deposit. However, if the tenant decides to move house, they may also lose the pot they have saved towards their deposit. Tenants signing up to this type of arrangement should take legal advice early on to avoid the possibility of losing thousands.
Plymouth based rent-to-buy company Rentplus is one of the few regulated companies within the sector. It offers tenants who earn under £80,000/year a five year renewable tenancy with the rent set at 80% of market rent. The tenant has a further opportunity to purchase at 10 years, 15 years and 20 years, although there is no obligation. If they do decide to buy, they are given a deposit equivalent to 10% of the property value as a gift.
However, this down payment can make it difficult for the tenant to get a mortgage. Some lenders will not lend where the deposit is ‘gifted’ unless the gift comes from a member of the would-be borrower’s family. Natwest, Halifax and Santander all said they would not lend in these circumstances. Barclays did say they would lend, provided the borrower put down 5% of their own funds and in addition, the gifted deposit was from an ‘approved scheme’.
Schemes that have less regulation should be avoided, particularly where there is a non-refundable uplift on rent payments to create a deposit pot. There is no guarantee that the tenant will get a mortgage in the future or will want to purchase the property if their circumstances change, and thousands of pounds can be lost. Further, tenants should be wary of bogus initial valuations which grossly inflate the price of the property at the outset.
There are plenty of alternatives to the current profile of rent-to-buy companies – including ‘Help to Buy’ and Shared Ownership.
The Help to Buy scheme allows buyers to borrow a percentage from the Government towards their mortgage (e.g. 20% outside of London or 40% in London), allowing them to get a better mortgage deal. With a 5% deposit of their own, the borrower can secure a mortgage on 75% loan-to-value terms with a lower rate of interest to pay.
Shared Ownership schemes allow buyers to purchase from 25% to 75% of the property and rent the remaining share. They then purchase additional shares in the property when they can afford to do so.
First time buyers can use the above schemes in conjunction with the new Lifetime ISA which was launched in April. This allows those over 18 and under 40 to save towards a new home, with a 25% bonus added at exchange of contracts.
For those in Council-owned property, the right-to-buy offers a further way to purchase their first home for less. Council tenants have the right after renting for a number of years with a discount of up to £78,600 (£104,900 in London).
Housing Association tenants instead have the right to acquire after a number of years, with a flat rate discount of between £9,000 and £16,000 on offer, depending on your area. In Liverpool the discount is £9,000.
Need advice about getting your foot on the housing ladder? Contact our property team…