What Is Rent To Buy Scheme UK?
The rent-to-buy scheme allows hopeful homeowners a pathway onto the property ladder by renting a property for an agreed period, usually around 5 years, during which they pay lower-than-market-value rent. This gives them time to save funds towards a mortgage deposit and prepare for the process of buying the home.
Introducing Rent-to-Buy Schemes
Rent-to-buy schemes are an innovative way of making homeownership achievable for more buyers who struggle to take the first step. They provide a middle ground between renting privately at full market rates and buying a home outright.
A rent-to-buy home belongs to a housing association or private company. Tenants pay a reduced rent which is typically 20% below local market rates. Many can then exercise an option to buy the property at an agreed price once the rental period ends.
During their tenancy, rent-to-buy tenants build up savings for a deposit. They also have time to get mortgage-ready by improving their credit rating if needed. This puts them in a position to secure a competitive mortgage deal on the home when the purchase option opens.
Where rent to buy differs from the more common shared ownership scheme is that eventually, tenants own 100% of the property. There is no remaining social housing landlord once bought.
Who are Rent to Buy Schemes For?
Rent-to-buy schemes help aspirational yet priced-out buyers get a foothold on the ladder. They suit first-time buyers the most. But they are also viable for previous homeowners now struggling to rejoin ownership.
Typical applicants include:
- Young professionals with decent incomes but without family help for deposits
- Newly forming households unable to keep pace with fast-rising prices
- Key workers in areas with high affordability barriers like teachers, nurses, police etc
- Returning ex-pats or divorced people with no housing equity
- Existing social renters with steady jobs
- Self-employed people or those with irregular incomes
Rent to Buy Schemes vs. Shared Ownership
Rent-to-buy and shared ownership schemes share some traits. Both let hopeful buyers become homeowners via non-standard routes. Each sees participants pay subsidised rent rates during an initial period too.
But the two models part ways when it comes to how much tenants must purchase. Shared owners only ever buy between 25-75% of their home. A housing association keeps the remaining share and charges rent on it.
Under most rent-to-buy deals, participants aim to own 100% eventually. Several years of reduced rents put them in a prime position when the right to buy comes up. There are no awkward part-purchases.
This end difference means rent-to-buy schemes often appeal more to buyers determined to fully own. Shared routes suit those happy to always rent part of their home in return for cheaper entry costs today.
How Do Rent-to-Buy Schemes Work?
Rent-to-buy schemes vary but generally work as follows:
- Participants apply and qualify to rent a property below market rates from a registered provider. Checks confirm they can realistically save for a deposit during the rental timeframe.
- An occupancy contract sets out rental terms of usually 3-5 years. Rents sit around 20% under comparable private lets. Maintenance and repairs fall to the landlord.
- During their subsidised tenancy, occupants direct extra funds towards mortgage deposits and getting mortgage ready. Some schemes require monthly savings contributions.
- Near the end of the term, tenants can exercise their right to purchase the rent to buy a house outright. The previously agreed buy price reflects the property’s market value at the start of the rental contract.
- Buyers generally need at least a 5% deposit and a mortgage for the balance. They pay no extra fees beyond typical purchase costs like surveys and conveyancing. The home becomes entirely theirs once bought with no outstanding landlord interest.
Benefits of Rent-to-Buy Schemes
Rent-to-buy schemes are win-win for serious buyers needing an alternative route to ownership. Benefits include
- Paying under market rent makes saving for a deposit far quicker. Surplus income builds equity instead of disappearing into a landlord’s pocket.
- Knowing the maximum future purchase price provides peace of mind. Buyers avoid being gazumped or priced even further out of the market later.
- Time on the property ladder via rent to buy counts towards total ownership when applying for future mortgages.
- Schemes often permit buyers to make interior cosmetic changes during the rental period, personalising homes for eventual ownership.
Along with helping more people own properties, rent-to-buy schemes free up social homes. Move-on chains mean each successful staircasing tenant potentially allows multiple families in temporary accommodation to secure long-term social rents.
Government Backing for Rent to Buy
With over 2 million families predicted to be stuck long-term in privately rented housing, rent to buy is vital for social mobility. Recognising this, the government now offers funding worth £8.5 billion towards delivering rent to buy houses and other affordable home ownership products through housing associations.
Tax incentives also exist to attract more private developers into the sector. These include zero capital gains tax on rent-to-buy sales and relief on the Community Infrastructure Levy which would normally apply to new builds. The stamp duty holiday for first-time buyers saving up in a scheme is ongoing.
Government figures show three-quarters of households use rent to buy their home when the rental term is complete. And buyer satisfaction scores are impressively high.
Future Expansion Hopes
Industry and government are aligned on rent-to-buy’s potential to tackle the homeownership decline. If targets are met, almost above 30,000 subsidised mid-market rental properties giving occupants a right to eventual purchase could be released each year by 2025.*
Mass quick delivery of ready-to-rent units via offsite construction, faster planning consents, and partnerships with ethical investors all underpin the blue sky ambition. Success requires central and local government supporting build-to-rent developers so homes suit eventual purchase at non-inflated values.
Research by Crisis shows up to 2.4 million households would benefit from some form of intermediate tenure like rent to buy over the next five years. Helping even a fraction of them would still signal a major positive direction of travel for ownership levels.
Rent-to-buy schemes provide practical help to those who can rent affordably but can’t yet buy. Reduced rents during an occupancy period let participants be directed towards deposits for when their future purchase option opens. Schemes counteract social immobility and support government housing goals. If nurtured appropriately through public-private investment partnerships, this innovative model offers hope of again making homeownership reachable for all who desire it.