Rent to Buy Mortgages

If you’re keen to get on the property ladder but struggling to save for a deposit because of the cost of renting, a Rent to Buy mortgage could be the solution.

In this article we’ll explain what Rent to Buy is, how it works and why you should speak to a broker if you’re considering it to ensure you make the right decision about whether to go ahead.

What is the Rent to Buy scheme?

Rent to Buy is a government approved scheme designed to help renters buy a property. Each scheme is run by a housing association that rents a home out on the understanding that the renter(s) will eventually buy the property from them.

It is available on selected new homes and offers subsidised rent payments set at 80% of the local market rate for a fixed period of between six months and five years. The idea of the reduced rental amount is to allow renters to save for a deposit to put towards buying the home.

You are not obliged to put away the 20% you save on rent payments, but if you spend it, you run the risk of losing the property after your rental period is up.

What if you can’t afford to buy the property at the end of the rental period?

Circumstances change and, even if you do save the entire 20%, you may not be eligible for a mortgage to buy the full property straight away.

In this instance, you can enter a Shared Ownership arrangement whereby you buy part of the property and continue to rent the rest. As your affordability increases over time, you can then increase the amount of the home you own. This process is known as staircasing.

If you come to the end of the initial rental period and cannot afford to buy any part of the property or are ineligible for a mortgage, you may need to vacate it. Borrowers finding themselves in this position are advised to speak to a mortgage broker as, often, there are specialist lenders out there who will approve a loan where high street banks have refused.

But you don’t have to wait until the end of the rental period to buy. You can make an offer to buy the property or enter shared ownership at any time during the lease.

Eligibility requirements

Eligibility criteria varies, but as a general rule, you would need to have a household income of less than £60,000 per year and intend to use the property as your main home. Not all schemes have an income cap.

It is generally aimed at first-time buyers, but previous homeowners who have gone back to renting are welcome to apply.

A credit check will be completed at the time of application, and you will need to meet the lenders’ requirements when you go for a mortgage to buy the property. Therefore, a good credit record is generally required to be accepted onto the scheme.

If you have any adverse on your credit file, you should seek professional advice before starting the application process. This is because eligibility criteria can be quite strict and there may be another route to homeownership that is more suited to your circumstances.

Some housing associations will also have other restrictions. For example, you may need to already be a social housing tenant or have links to the local area.

Is the scheme available right across the UK?

Rent to Buy is only available in England and Northern Ireland. Wales has its own scheme called Rent to Own. There are other Help to Buy schemes in Scotland.

The Welsh Rent to Own scheme is similar to Rent to Buy. With Rent to Own, you pay rent at the going market rate for up to five years. You can opt to buy the property at any point after you have been renting it for two years.

When you choose to buy, you will be refunded 25% of the rent you have paid to date and receive 50% of any increase in the value of the property since you began renting it. This can be used to pay the deposit and help you get a better rate on your mortgage.

Renters in London can use the London Living Rent scheme. This works almost the same as Rent to Buy, but tenancies are taken out for a minimum of three years, and rental payments are only 66% of the market rates.

How to get a mortgage through Rent to Buy

Follow these steps to give yourself the best chance of getting a mortgage on a Rent to Buy property.

1. The way to get a Rent to Buy home differs slightly according to where you are in the UK:

• In most of England, you will need to register with the local Help to Buy agent covering the area you want to live in.
• Those looking for a Rent to Buy property in London will need to visit the Homes for Londoners website.
• In Northern Ireland, you can register for Rent to Buy via the Co-Ownership website
• For Rent to Own in Wales, you will need to apply through one of the participating landlords.

It’s not uncommon for applicants to be placed on a waiting list as there are limited properties.

2. Once you have successfully completed your application for the Rent to Buy scheme, it’s time to start planning for your mortgage application:

• Save: Putting away the 20% you save each month will give you a decent deposit and increase your chances of being approved for a mortgage.
• Get your credit in order: Cancel any unnecessary subscriptions and ensure you meet all your monthly commitments throughout the time you’re renting.
• Make sure you are on the voters register at the new property.

For full details of how to prepare for a mortgage application, read our guide to the mortgage application process.

3. Speak to a mortgage broker experienced in the scheme.

When the time comes to buy, an independent whole of market mortgage advisor will be able to make sure you get the best deal according to your circumstances. It’s best to contact a broker around six months before you’re ready to apply as they will advise you on anything you need to get your application over the line or enhance it to get a lower rate on your mortgage.

What are the interest rates like?

You will need to apply for a mortgage in the normal way so the rate you are offered will be dependent on your circumstances. Rates are no different for Rent to Buy borrowers compared to anyone else.

The best interest rates on the market are reserved for those borrowers deemed lowest risk.

Typically, this is because of:

• Steady income
• Good affordability
• Good credit
• Large deposit

Putting aside all of the 20% you save on rent, is likely to give you a deposit of somewhere between 5% – 10% of the value of the property. This is a guide only as there are several factors that affect property prices.

With this size of deposit, your loan to value (LTV) will probably be between 90% – 95% and, currently (May 2023), interest rates are likely to be around 4.5%-5.5%. With a larger deposit, lower rates may be accessible.

Alternatives to Rent to Buy

Other government schemes include:

• Help to Buy Equity Loan: A loan of up to 20% of the property value which is interest-free for five years and can be used towards your deposit. First-time buyers in London can borrow up to 40%. NB: This scheme ends on 31st March 2023.
• Shared Ownership: There are lots of Shared Ownership opportunities available outside of Rent to Buy.
• Right to Buy: Council tenants can buy the home they are living in at a discount.
• First Homes Scheme: Only available to first-time buyers in England. Buyers can purchase selected new build properties from a developer or from someone who originally bought it as part of the scheme, with a 30% – 50% discount.
• Lifetime ISA: The government will pay a 25% bonus in savings you put towards a deposit.

Get matched with a broker who specialises in Rent to Buy

Rent to Buy is primarily aimed at those who can afford mortgage repayments but are struggling to get together a deposit. It allows them to move into what will be their family home now, and then put themselves into a position to buy.

But it’s just one of several government mortgage schemes and is not necessarily the best choice for everyone with dreams of homeownership. To discuss your circumstances and work out whether Rent to Buy is right for you, you really need to speak to a mortgage broker who specialises in this type of lending.

Our unique broker matching service will pair you up with the right broker for you based on your circumstances and their industry experience.

Call today on 0808 189 0463 or enquire online to be matched with your ideal broker.