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The age-old debate between buying a flat (apartment) and a house continues to be somewhat of a dilemma for homeowners. Each option comes with...
The dream of buying your first home can feel so far away, especially for those struggling to save for a hefty house deposit. According to Homelet, the average UK monthly rent is over £1,200. Fortunately, there are alternative paths to owning your first home, and one way is the rent-to-buy scheme. In this article, we’ll […]
24 January 2024
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The dream of buying your first home can feel so far away, especially for those struggling to save for a hefty house deposit. According to Homelet, the average UK monthly rent is over £1,200. Fortunately, there are alternative paths to owning your first home, and one way is the rent-to-buy scheme. In this article, we’ll delve into the rent-to-buy scheme, covering everything from eligibility criteria to the pros and cons.
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Rent to buy, (also known as rent to own), is a housing scheme in England designed to help home buyers who are making the move from renting to homeownership. This scheme allows tenants to rent a newly built property at a reduced rent (around 20% less than market value) for up to five years. You then have the option to buy it at a later date. This can be particularly beneficial for those facing challenges in securing a mortgage or saving for a traditional down payment.
In a rent-to-buy arrangement, tenants sign a shorthold tenancy agreement that typically spans 6 months to five years, for around 80% of the market rental value. During this period, the money saved on rent is expected to go towards building a deposit for the eventual purchase of the property or purchase of part of the property, using a shared ownership scheme. You can purchase the property, or part of the property using shard ownership, at any time during the lease. At the end of the lease term, tenants have the option to buy the house at a pre-agreed price.
While you’re renting the property, you won’t need to get a mortgage. However, the goal is to secure a mortgage (usually 5% minimum) at the end of the lease period, allowing you to officially become the homeowner, so knowing how much mortgage you will be likely to get will be advantageous.
Rent-to-own is another term, which is used to describe the rent-to-buy process, where renting precedes the potential purchase of the property.
Eligibility criteria can vary and you can check if you are eligible on the Government webiste, but generally, individuals with a stable income and a decent credit history can qualify. You could be eligible if:
Priority can sometimes be given to existing housing association tenants and council tenants and each housing association can also have its own specific eligibility criteria. Consult with housing authorities or developers offering rent-to-buy schemes for specific eligibility requirements in your area.
While the rent-to-buy scheme can be a great way to get on the property ladder if you can’t afford a deposit, whether rent-to-buy is worth it depends on your financial situation and homeownership goals. Consider your long-term plans, financial stability, and willingness to commit before entering into the scheme.
Here is an example of how it could work:
Market rent £1200
Rent with rent to buy £960
Amount saved per month £240
Total saved after 3 years £8,640 (or £10,800 if saved in a Lifetime ISA)
Total saved after 5 years £14,400 (or £18,000 if saved in a Lifetime ISA)
To apply for a rent-to-buy scheme, contact housing developers, local authorities, or housing associations offering the scheme. They will provide information on available properties and guide you through the application process.
How Do I Find a Rent to Buy House?
Local housing authorities and developers are good places to start your search for rent to buy properties. Networking with real estate agents can also help you to find rent-to-buy properties.
While both aim to make homeownership more accessible, shared ownership involves purchasing a percentage of the property and paying rent on the remaining share. In contrast, rent-to-buy focuses on renting initially with an option to buy the entire property later. However, it may be possible to take part in the Rent to Buy scheme and then buy a proportion of the property using the Shared Ownership scheme. With shared ownership, you buy a proportion (e.g. 25%) of the property and pay rent for the remaining value. However, you can then gradually buy the remaining share of the property through a process called staircasing.
If you live in London then, Rent to Buy is known as London Living Rent, but the scheme is the same as Rent to Buy. You rent a property for less than market rate for 3 or more years, while you save up a deposit.
In Wales, the scheme is known as Rent to Own and involves renting a property at the going rate for up to five years. After two years you have the option to buy the property. If you decide to buy you will receive 25% of the rent you have paid and 50% of any increase in the property’s value since you moved in to use as a deposit on the purchase.
Rent to Buy is not available in Scotland.
Other options include government-backed schemes like Help to Buy, guarantor mortgages, and exploring properties in more affordable areas.
Save to Buy is a scheme launched by developer Fairview New Homes that helps individuals save to buy a home in and around London. Unlike traditional methods of saving a deposit before buying, the scheme allows first-time buyers to live in their home for up to 2 years, whilst saving up to purchase the property. Buyers effectively live in the property ‘rent free’, with the rent paid going towards their deposit.
To be eligible for the Save to Buy scheme you must:
You can apply for the Save to Buy scheme on developments where there is availability. If approved for the scheme, you complete a reservation form and exchange contracts with a 1% deposit. The monthly payment is based on the applicant’s personal financial situation and the average local monthly rent. When the buyer is within one month of saving the required deposit amount, they submit a mortgage application to an appropriate lender to buy the property through the usual house-buying process.
Some lenders offer 100% mortgages, but they are less common due to associated risks. Research various lenders and mortgage products, and consult with a financial advisor to explore the feasibility of a 100% mortgage based on your financial situation.
The rent-to-buy scheme offers a flexible and accessible path to homeownership for those who are unable to save a deposit. Before embarking on this journey, carefully weigh the pros and cons, assess your eligibility, and explore alternative options. With the right information and guidance, you can make an informed decision on whether rent to buy is right for you.
From mortgages and insurance to viewings, offers, exchange and completion, our Buyers’ Guide will take you through everything, step by step, from start to finish.
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