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The Stephens family sign up to the Rentplus scheme.
The Stephens family was among the first in the country to sign up to the Rentplus scheme. Photograph: Sam Frost/The Guardian
The Stephens family was among the first in the country to sign up to the Rentplus scheme. Photograph: Sam Frost/The Guardian

How a ‘rent to buy’ scheme is making home ownership a reality

This article is more than 7 years old

With the gap between wages and house prices sparking a huge fall in ownership in the UK, we look at schemes such as Rentplus that are helping those priced out

They were the words that father-of-two Adam Stephens had waited so long to hear: “This is your house and it’s going to be your home for the next 10 years. After that, you may decide you never want to leave. It’s up to you.”

On hearing that from his new landlord, Stephens felt a “massive, massive sense of relief”. He says he didn’t know whether to jump up for joy or sit down and cry. “She gave us the keys and told us to settle in and enjoy our new house. And from that point on, it’s never felt like we’re renting. It feels like this is our home.”

Stephens and his wife Rebecca, both aged 26, used to rent a damp and mouldy two-bed house for £600 a month, where they lived with their daughters Chloe, six, and Maisie, two. In March, they became one of the first families in the country to join an innovative rent-to-buy housing scheme called Rentplus, and moved into a newly built house owned by the scheme in Sherborne, Dorset, where he works as an electrician.

Although their rent has increased to £635 a month, the Stephens estimate their home is worth around £260,000 and, under the terms of the scheme, they pay 20% less each month than it would cost them to rent it on the open market. But the biggest bonus for the Stephens, who have no savings, is that they will receive a 10% “gifted deposit” from Rentplus to buy the home after 10 years.

The Stephens are lucky; a report this week found that home ownership in Britain has plummeted to its lowest level in 30 years as the growing gap between earnings and property prices has created a housing crisis that extends beyond London to cities and towns across the country. A separate report from Scottish Widows found that 35% of 35- to 44-year-olds are now renting, while 20% of the over-55s have been unable to get on to the property ladder.

So are schemes such as Rentplus the solution? The initiative is only three years old and is funded by long-term private investors, including £70m from the pension fund of BAE Systems. It plans to spend £1bn and source 8,500 rent-to-buy homes, as it buys affordable housing estates from developers, which are then managed by housing associations and later offered for sale to tenants with a 10% gifted deposit.

This is not a social housing scheme, but a hard-nosed, profit-making operation, which the pension funds like as it is expected to earn them a steady stream of rental income plus possible capital growth.

Local authorities do not usually allow private investors to purchase developments set aside as affordable housing. However, Rentplus says it is fully compliant with the government’s National Planning Policy Framework – it charges the official government definition of an affordable rent and is helping the government meet its recent commitment to build 10,000 affordable rent-to-buy homes by 2018.

The firm says it will have 5,000 rent-to-buy homes across the country by March 2020, delivering homes in Cambridgeshire, Gloucestershire, Oxfordshire, Essex, Suffolk, Northants, Devon, Somerset, West Devon, South Hams, Sedgemoor, Plymouth and Bicester by March 2017.

home ownership rates

For tenants like the Stephens, the scheme is very attractive. “We’ve always dreamed of buying our own place,” Adam says. “But we got into debt on our credit cards when we were young. Then we had a baby, my wife stopped working and we missed a payment. Everything spiralled from there. Eventually we had to take out an individual voluntary arrangement (IVA) with our creditors.”

As a result, the Stephens, whose annual household income is £35,000, are not eligible for a help-to-buy mortgage. They have also been unable to save for a deposit, focusing instead on meeting the IVA’s strict repayments of £200 a month. “We thought we were stuck and there was no way out for us. And every year, our rent was going up by £180, we had no security and the girls were constantly getting coughs and colds because of the poor state of the house we lived in.”

When they heard about Rentplus, they decided to apply for the scheme – and they were not alone. According to Rentplus, demand for the 52 properties built so far has been so high that one home attracted 275 applications.

“We never expected we’d be accepted, because of our IVA,” Adam says. “However, when we stop having to repay our debt in a year’s time, we’ll be able to save £200 a month into a help-to-buy Isa instead.”

As well as being able to save, the Stephens had to demonstrate they have strong local connections and a long-term commitment to living in Sherborne. Adam explains that they feel extremely lucky. “Ever since we were allocated a property, we’ve been feeling more optimistic about our future.”

Is the so-called below-market rent genuine? It would appear so: currently there are no three-bed houses to let in Sherborne for less than £750 a month, with many in the £800 to £1,000 range.

Under the terms of the scheme, tenants rent a newly built property for five, 10, 15 or 20 years from a local housing association landlord, which Rentplus pays to manage its properties in a particular location.

This housing association sources the tenants, either through local authority housing waiting lists or via the local authority’s choice-based letting system. Decisions are made on a case-by-case basis, although Rentplus expects the scheme to be suitable for around 60% of the people on waiting lists.

There is no deposit to pay and tenants will pay either 80% of the market rent or a sum equal to the local housing allowance – whichever is the lower of the two – to enable them to save every month while they are renting.

During the pre-agreed rental period, tenants can leave the property with a month’s notice. But provided they pay their rent on time, display no anti-social behaviour and stick to the terms of their agreement, the housing association landlord cannot ask them to leave.

Their rent will increase by 1% plus inflation (as measured by the consumer prices index) each year. Every five years, it is reset at no more than 80% of market rent.

Unlike shared ownership schemes, tenants do not have to pay for service charges or repairs while they are renting the property.

At the end of the agreed rental period, as long as the original tenant is still living in the property, Rentplus will transfer a 10% cash deposit to the tenant’s solicitor prior to the property purchase.

Unfortunately, when the Stephens come to apply for a mortgage, their choice of lenders may be restricted by the 10% gifted deposit they receive from Rentplus.

Both borrowers and solicitors must declare to mortgage lenders where deposits for purchases come from and not all lenders will accept a gifted deposit, according to the Council of Mortgage Lenders. “This is very much an individual decision for lenders,” says spokesperson Sue Anderson. “Lenders may be satisfied, or they may require the borrower to put in additional deposit funds, or they may not wish to lend in these circumstances.”

She adds that lenders will generally be much happier with a gifted deposit if it is accompanied by some of the borrower’s own savings.

What if a tenant is unwilling or unable to buy their property on the date they had originally planned to purchase it? Richard Connolly, chief executive officer of Rentplus, says housing associations will assess tenants’ circumstances a year in advance and flag up any problems. The housing association will then try to offer the tenant another long-term tenancy in the same property, with the option to buy at a later date and still receive the 10% gifted deposit.

However, Connolly stresses, eviction is the worst-case scenario and it is more likely the housing association would offer the existing tenant a new tenancy agreement or a shared ownership scheme.

Campbell Robb, chief executive of Shelter, says: “It’s positive that new and innovative schemes are coming forward to help families who wouldn’t otherwise be able to afford a stable home of their own. However, this is obviously a small part of the much bigger plan needed to fix our chronic housing shortage. With current housing costs so high, even schemes charging 80% of the market rent for a home will still be well out of reach for many families on lower incomes.

Alternative ways to escape the rent trap

Are you stuck in a cycle of ever-rising rents, unable to save for a deposit, and with house prices racing ahead of you? There are no easy solutions for the millions of mostly young people who are victims of the housing crisis – but there are a few schemes worth considering, writes Patrick Collinson.

Help-to-buy loans
Under this scheme, you only have to put up a 5% deposit to buy a house, as the government steps in with a loan. In its simplest form, you take out a 75% mortgage, the government funds the other 20% with an interest-free loan, and you add in the 5% deposit. In London the government loan is worth up to 40% of the price, while in Scotland the maximum is 15% and elsewhere it is 20%. When the home is sold, the buyer returns the same percentage of the sale price to the government. Full details at Helptobuy.gov.uk.

So what are the drawbacks? The scheme is only open for buyers of new-build homes, so you can’t buy an old wreck of a place to do up and help you move up the property ladder. The 75% mortgage you take out is a specialist help-to-buy one, and can be pricey. About the best is the two-year deal from HSBC at 3.69%. If you want a five-year fix the rates are around 4.75%. But after this week’s interest rate cut these deals may get better.

Only new-build homes are eligible for help-to-buy loans. Photograph: Murdo Macleod/The Guardian

When you come to sell, if the market has been rising then the government does rather well out of it. Analysis by property firm Hometrack earlier this year said that since it first opened in 2013, the government may have made a profit of around £213m as house prices have surged.

If house prices fall, then you still have to pay back the money loaned by the government, although it will accept a proportional reduction. The government gives the example of someone who buys a home for £200,000 and sells it after three years for £180,500. The original government 20% loan was worth £40,000, but after the price falls you’ll only have to pay back £36,100.

Of course if prices rise, you are losing some of the gain too. It may be better just to cobble together a 10% deposit somehow, and buy in the conventional market with a 90% deal. A £200,000 home on help-to-buy costs £766 a month, but you only own 80% of it. The same house costs £852 a month with the current best 90% mortgage, and you aren’t limited to new-builds.

That said, just over 80,000 people have taken advantage of help-to-buy equity loans, with the average house purchase price at £223,000. The government caps the maximum purchase price at £600,000.

Help-to-buy Isas
This is a savings scheme for first time buyers, where the government chips in an extra 25% on top of what you are able to save yourself. For example, for every £200 a month you save, you receive a government bonus of £50. You can keep doing this until the account holds £12,000 – made up of £9,000 from the saver and £3,000 from the government. For a couple, that means up to £24,000, with £6,000 coming from the Treasury. Halifax and Virgin Money currently offer the best rate of interest on these accounts, at 2.5%.

The accounts are available to anyone aged 16 and over who doesn’t already own a property anywhere in the world, and to get the bonus the money must be used to buy a house before the end of 2030. If you abandon your plans to buy a home you can decide to withdraw the money from the Isa. The interest will be tax-free but there will be no government bonus. Full details at helptobuy.gov.uk

The biggest drawback to this scheme is that buyers are limited to properties worth a maximum of £250,000, or in London £450,000. Above this price, the government won’t pay out the bonus. It means if you aim to buy in an expensive town in the south-east, such as Brighton, Guildford or Cambridge, you will have to settle for a one or two-bed flat to keep within the price cap.

Shared ownership
The idea here is that you only buy a 25% to 75% share of a home, and pay rent on the rest. Later on, you can buy bigger shares when you can afford to.

One of the main advantages is that the portion you are paying the rent on is relatively cheap, and the landlord can’t decide to throw you out on a whim. However, the scheme is not without its critics; many complain that the housing association management fees can be high for the services offered, and few people can afford to “staircase” upwards to full ownership. When you come to sell, the money is split strictly along the lines of the original percentage agreement, even if you have carried out (and paid for) improvements to the property. You also have to, initially at least, offer it for sale through the housing association rather than on the open market.

To qualify for a shared ownership home, your household has to earn less than £80,000 a year outside of London, or £90,000 in the capital. Some schemes will have tighter eligibility criteria.

Shared ownership is most popular in London, but does operate across the country. There are separate websites listing properties in various parts of the country at helptobuy.gov.uk. London mayor Sadiq Khan wants to boost shared ownership and says he will give priority to people who have been renting privately for more than five years.

However even a 25% share of a home can be a real stretch for buyers, especially in London. For example for a minimum 35% share in a one-bed flat in Islington, the deposit required is £18,725, and the anticipated monthly repayment (including mortgage, rent and service charge) is £1,826. For a two-bedder the cost is £2,529 a month, with the flats priced at £805,000. For someone earning even £90,000 a year, that works out at more than half of take-home pay.

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