The UK Rent to Buy Scheme: How does it work?
The UK’s rent to buy scheme was created by the government to help first-time buyers get onto the property ladder; allowing a young professional to save for a mortgage even if they couldn’t afford a deposit. It was actually created to help those who just before the property crash in 2007, had been approved for shared-ownership deals but required 100% mortgages. Once the market crashed, this was no longer an option and those individuals were unable to get a mortgage.
In response to this, the government offered cheap loans to help housing associations and social landlords build 10,000 new homes for first-time buyers. In fact, the government invested £400 million between January 2015 and March 2017. Half of that investment went into projects in London and the other half was spread around the rest of the country.
What happens on the rent to buy scheme?
If an individual is interested in getting onto the rent to buy scheme, they would rent a new build at 20% less than the market rate for around five years – although the exact time period varies depending on the property. During that time you could either buy the property or buy part of the property under shared ownership. However, once you get to the end of the time period you have to either buy part of the property or move out.
How do I know if I am eligible for rent to buy?
An individual looking to check their eligibility for the rent to buy scheme must meet the following criteria:
- You or your household has to earn £60,000 or less per year (or £64,300 if you are looking for homes in London,) but no less than £21,000.
- You are a first-time buyer or you have previously owned a house but can no longer afford to buy one now.
- You have a good credit history.
There are criterium which varies depending on your location. We therefore recommend checking with your local agent to gain more specific information.
How do I apply for the rent to buy scheme?
- Firstly, you would need to register with your local rent to buy agent. They will be able to offer you tailor-made information and let you know if you are eligible for the scheme.
- Keep a lookout on your local agent’s website as properties becoming available.
- Make enquiries about any property that is appropriate for you.
How much could I borrow under rent to buy?
You could borrow up to £750,000 but there are strict limits on the borrowing amounts available which often means that you wouldn’t be able to borrow more than 55% of your post-tax income.
What are the advantages of the rent to buy scheme?
- For certain individuals, this may well be your only way of purchasing a property.
- At the end of the time period you will have saved far more money than if you were simply renting a property thanks to the lower rental rates.
- There is no obligation – at any point you are able to walk away and not purchase the property, giving you a huge amount of personal freedom.
- You need a far smaller deposit, at only around 5% which is much less than any other down-payment options.
- You are able to borrow money completely interest-free for five years and even after that time period you gain access to competitive loan rates at around 1.75% which is far lower than any other regular option.
- You will be able to gain access to far cheaper mortgage rates.
What are the disadvantages of the rent to buy scheme?
- A prospective buyer will not have access to the entire mortgage market.
- The market is limited to brand new builds.
- Participants are subject to market fluctuations as fees may change over time.
- The loan amount is not fixed.
- The interest on the loan will increase each year after the initial five free years.
What are the current concerns around the Relp to Buy Scheme?
- There is a concern that the relp to buy scheme has inflated house prices and that when the scheme ends the housing bubble will burst, causing many to be trapped in a property with negative equity.
- There are significant differences in rates between providers and locations.
- The property valuation is made at the time you decide to purchase which means that if house prices continue to rise you may not be able to afford the property at the end of the five years.
- There may be clauses around who you sell the house to if you move out, with some housing associations requiring you to sell to a candidate on their list.
- There has been a fair amount of criticism that rent to buy has only served high-earners whose average wage is around £40,000 which is far above the national average.
- You may not use a rent to buy scheme to buy a property to let.
As a first time buyer, what are the other methods I could use to could purchase a property?
- A rent to buy equity loan offers you up to 20% free interest for five years for new build homes only, with a limit added on the value of the house.
- Shared ownership means you can buy a percentage of a new built home and rent the rest.
- Rent to buy allows council tenants to purchase their property at a reduced rate.
- It may also be worth looking at our page for guarantor loans as, occasionally, having a parent or a loved one act as a guarantor can be tremendously helpful.
- A rent to buy ISA allows you to save up to £200 a month and when you are ready to buy a home the government will top up your ISA by 25% to a bonus of £3,000.
If I live in London can I also benefit from this scheme?
Yes, as London is far more expensive than other areas of the country it has a specific rent to buy scheme that sees the government lend you up to 40% of the property value without any interest for the first five years. This means that your monthly payments will be far lower and should mean your mortgage is much lower. However, the government does have control of up to 40% of the property and you will need to start paying this back at the end of the mortgage or when you sell.
If you are interested in taking out any other loan please do take a look at our dedicated loan page to see the best rates on the market.