'Rent to buy'? Good idea, but it's a shame about the small print
Struggling to save enough for a deposit on your first home? Check out your local housing schemes – and watch out for the catches.
Sunday 13 September 2009
Getting your hands on a property if you are a first-time buyer is no mean feat at the moment. Lenders want big deposits and yet savings rates are at rock bottom, making it hard to accrue any sort of down payment.
The Government has made a big deal about how it stepped in to help those with limited incomes take a running jump at the property ladder – letting you try out a property, at a low rent, before you buy. But tight criteria and variations in terms and conditions mean to get to moving day, you will have to have your wits about you.
Rent to HomeBuy lets you move into your intended new-build property and pay a reduced rent that is, at most, 80 per cent of the market value. This enables those who have no deposit to save at least 20 per cent of what they would pay per month in rent on the open market to put towards a down payment. The Rent to HomeBuy scheme was designed to help those who, on the eve of the property crash, had been approved for shared-ownership deals but had been relying on 100 per cent mortgages. As soon as the market crashed, the option for 100 per cent finance was pulled, and these candidates were unable to get a mortgage.
The scheme runs for up to five years and at any point you have the option to buy the property in its entirety, or between a 25 and 75 per cent share of it through the New Build Home Buy scheme. Until you commit to buy, or the end of the five years, you are a normal tenant and are under no contractual obligation to purchase.
Rent to HomeBuy and other HomeBuy schemes are run by regional HomeBuy agents who are, in effect, not-for-profit estate agents. They are in charge of assessing your needs and eligibility and will then show you which of their properties you can get. When you move in, your HomeBuy agent will talk to you about the potential value of your home, and how much you need to aim to save each month in order to buy before the end of the five years. Once you are in a property, the agent will check in with you periodically to see if your saving is on track.
Rent to HomeBuy is aimed at lower-income households which are not eligible for, or are low priority for, social housing, but still don't earn enough to buy through the usual route. So, to get on a scheme, you'll have to qualify under an affordability criteria ensuring your household earnings total no more than £60,000 and no less than £21,000. You also have to be a first-time buyer and must demonstrate that you can't buy on the open market.
If you do qualify and are offered a property, Rent to HomeBuy comes with no contractual obligation to buy. This means you can take advantage of the reduced rent, giving you breathing space to save for a deposit. You will have plenty of time to decide whether to buy. "We don't want to frighten people away by obliging them to purchase at some point," says Ben Clay, the head of home ownership at social housing association HomesHub.co.uk. "It's about maximising their choice, not about trapping them." The scheme can also give access to properties that would otherwise be unattainable for a first-time buyer, and while you are renting, you are dealing with a social landlord, which may offer some an extra feeling of security.
The schemes sound simple in principal, but one drawback is that in practice, they vary between geographical regions as they are administered by different Registered Social Landlords (RSLs). Some schemes will offer the basic package of a 20 per cent reduction in rental rate for five years, but others will offer a greater reduction or let you put all the rent you pay for the first year towards your deposit when you come to buy the property.
"There's lots of different providers doing similar but slightly different things, which is confusing," says David Ellis, the group director of business development and marketing for Catalyst Housing. "We are trying to make it as simple as possible for those struggling to save a deposit but people need to be vigilant and understand what is being offered before they sign up."
Ultimately, the help you will get is down to the location of the property, and some will get more financial aid than others. But when it's time to buy, arranging mortgage finance may not be easy. "The downside of rent-back is that many mortgage providers will not take the rent-back as a deposit," says Mr Ellis. "There is red tape around the money that will make it more difficult." Lenders will instead deduct the lump sum off the value of the house and then lend against this figure, meaning you'll still need extra deposit cash.
Another catch is that the schemes are designed for those who are only going to be buying into a shared ownership scheme at the end of the five years, and not buying outright. "The big issue with shared ownership," says Michael O'Flynn, the director of online estate agent findaproperty.com, "is that if you take 60 to 70 per cent share of the property with a view to incrementally buying a further share, if prices keep rising they can rise out of your price range. A rental period of five years puts people at greater risk of this." With Rent to HomeBuy, the property valuation is made at the time you commit to purchase, so even though you are saving, rising house prices could mean you can't afford to buy at all at the end of the five years.
There are also obstacles to getting on the scheme. The criteria can be restrictive. There may also be clauses about who you can sell the property to if you move out. Some housing associations will require you to sell to a candidate on their lists – at the market rate. As well as this, the number of properties owned and developed by social housing associations is limited. Where commercial developers deal in the thousands of lots, RSLs function in hundreds and so, despite massive demand, places are limited and, once accepted, you could find yourself at the back of a long queue.
Dream home: 'We were paying more rent per year than my wife earned'
David Newman, 42, a youth worker from Liverpool, moved into a three-bedroom house through the Rent to HomeBuy scheme run by Homeshub, part of the Plus Dane Group, in April – with wife Denise and son Tommy (pictured with his parents), and daughter, Charlotte.
"My wife and I both work but the house prices are just beyond us," says Mr Newman. "As we were not eligible for social housing, shared ownership seemed a good way to go. Before, we were renting privately and paying more per year than my wife's salary. Our new property is a three-bed house with a driveway and garden, one we could never afford on the open market, and we are paying half the rent we were."
The programme offered by Homeshub does include the first year's rent-back when candidates buy, and the family intend to take advantage of this. "With this amount, plus what we are saving in rent, we hope to buy half of the property by spring next year," says Mr Newman. "It may seem early in the five-year contract, but we are concerned that the longer we leave it to buy, the more the property will cost us. So it's in our best interest to buy as soon as we can afford to."
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