Even a small deposit to buy a home can be hard to save when rents and house prices are high. So a scheme that allows your rental payments to contribute to a future home deposit sounds too good to be true, right?
Possibly it is. Tenants who are renting properties through schemes that promise them the right to buy after several years may struggle to complete the deal, say mortgage brokers and property lawyers.
There are many “rent to buy” schemes on offer, but few are regulated. Rentplus is one scheme that is regulated. It offers five-year renewable tenancies with the option to buy, as well as “gifted deposit” on the property. Other schemes include “lease options”, a risky route where property investors act as middlemen between distressed sellers and tenants looking for a route to homeownership.
Individual sellers can also offer “rent to buy” schemes on online forums such as Gumtree, the classifieds website. Like lease options, this type of scheme is entirely unregulated and highly risky.
There is no suggestion that regulated schemes such as the ones offered through Rentplus are risky in the same way that unregulated ones are. However, mortgage brokers say that the way they operate may still make it difficult to get a mortgage after five or ten years.
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Rentplus offers tenants who earn less than £80,000 a year the chance to rent properties at 80 per cent of market rents for a minimum of five years. At the end of the five years the tenants can choose to carry on renting or buy, provided they can get a mortgage.
Rentplus, which last year secured an investment of up to £70 million from BAE Pensions Fund to deliver 580 new homes, will give the buyer a deposit worth 10 per cent of the property’s open-market value at the time of purchase. Tenants/buyers must also be registered on their local authority’s choice-based lettings register, shared ownership register or Help to Buy register. The problem lies in the gifted deposit. Ray Boulger, a spokesman for John Charcol, the mortgage broker, says few lenders would accept a deposit of this type. “We checked with Halifax, Santander and NatWest, and it was a no.” Boulger says that lenders are not keen on gifted deposits unless they are from a family member.
There might also be concerns about the accuracy of the valuation on which the deposit is based.
Mr Boulger says that Barclays would consider accepting a gifted deposit provided that it is from an “approved” scheme, but it would also require the borrower to put down 5 per cent of their own money. So any Rentplus tenant without significant savings would still find it difficult to get a mortgage at the end of the tenancy term.
However, Richard Connolly, the chief executive of Rentplus, says: “ Our first families will not be buying for at least three and a half years, by which time the mortgage market will change. We will be working with lenders to ensure that competitive mortgages are available at the appropriate time.
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“There are lenders that accept gifted deposits from third parties that are not family members — as long as it is not deemed to be a repayable loan, subject to interest or to a second charge on the property. Rentplus satisfies these requirements.”
For many, the long-term tenancies on offer make schemes such as Rentplus attractive. Tenants could also use Creditladder, a system sends records of rental payments to Experian, the credit ratings agency, so that rental payments can count towards their credit rating.
However, less regulated schemes should be avoided. Linda Kirk, the head of property at Slater and Gordon, a law firm, says: “The seller is reliant on the prospective buyer/tenant paying the mortgage. If they don’t then the seller will still be liable. And the buyer/tenant has no guarantee of getting a loan at the end of the term.”
Other ways to buy
Help to Buy
The government loan scheme, where you borrow a proportion of the cost of a new-build home interest-free for the first five years, is scheduled to continue until 2021. The government will lend up to 20 per cent on a property outside London, or 40 per cent inside the capital, if you’re able to save a 5 per cent deposit.
Shared ownership
Individuals or couples earning less than £80,000 (£90,000 in London) can buy a share of a home at 25 to 75 per cent of its value. The remaining share is owned by a housing association, to which rent is paid.
Lifetime Isa
A savings scheme for those aged between 18 and 40 where you can save up to £4,000 a year and receive a government bonus of 25 per cent until you reach the age of 50. The money can be put towards a deposit on a first home worth up to £450,000.
Right to Buy
Council tenants can buy their council home at a reduced rate — the maximum discount is £78,600 across England, but in London it is £104,900.