What is right to buy?
The right to buy scheme was introduced in the 1980s by the Conservative government. Its objective was to enable more people to become ‘king of their castle’ by giving them the right to buy the council house they occupy. The scheme has certainly met is objective. So far, more than 1.5 million people have now purchased property under the right to buy scheme. Today more than 17 million people own their own homes, whereas the figure was 12.6 million in 1983 and there is no doubt that the right to buy scheme has greatly contributed to this rapid growth in owner occupation.
How does the right to buy scheme work?
The legislation that covers right to buy is the 1985 Housing Act, which has subsequently been amended by further Housing Acts and the Leasehold Reform Housing and Urban Development Act 1993.
The Acts give tenants the right to buy their council owned property at a significant discount to its market value, subject to various rules and regulations. Tenants must have lived in their council house (or flat) for a minimum period of two years to qualify for the scheme and, once they have purchased the property, they must not sell it for a further three years (this could be extended to five years) or they will have to repay their discount.
The size of the discount depends on how long the tenant has lived in the property. Discounts start at 32% rising by 1% per year to 60% for a house and start at 44% rising to 70% for a flat. The purchase price of the property is determined by a district valuer.
In March 2003 upper limits were imposed in 41 different areas to prevent people from taking advantage of the right to buy system, particularly in London and the South East where rising house prices meant some people were being priced out of the market.
Although the 41 areas are restricted to England and will remain under review, the caps have had the effect of reducing the maximum discount from £38,000 to £16,000.
What types of mortgages are available for right to buy?
Right to buy is not treated as a mortgage product category, like buy to let or flexible mortgages, by most high street lenders (although it is treated as a separate product category by non-conforming lenders).
This means that tenants wanting to buy property under the right to buy scheme have the full range of mortgages on the market at their disposal. The only difference is that most lenders will allow tenants to borrow up to 100% of the discounted purchase price and some will even go beyond 100% providing the additional amount is for costs relating to the purchase and/or home improvements which will enhance the value of the property. A broad range of lenders – from mainstream to sub-prime – will accept right to buy applications and the usual array of discounts, fixed rates and tracker products are also on offer.
How difficult is it to arrange a right to buy mortgage?
In theory, it should be no different to arranging a standard mortgage, but there are a few issues to bear in mind.
The first issue is the nature of the property itself. Although a district valuer will set a price for the property, the lender will want to ensure the property represents an acceptable risk. Houses are generally not a problem, but large blocks of flats can be difficult as the property may not be easy to sell at a later date. The lender will look carefully at the size of the block of flats, the number of flats in private ownership and the location and quality of construction. Lenders will all have different criteria specifying what is and is not acceptable to them.
The second issue to consider is the creditworthiness of the borrower. Most borrowers will not have had a mortgage before and they may not, therefore, have much of a credit record. If the lender can see no record of the applicant taking out loans they may view them as an unknown quantity and may be more cautious as a result. You will also encounter borrowers with adverse credit records (CCJ’s and so on) and may, therefore, need to consider sub-prime lenders. A number of packagers have considerable experience of dealing with sub-prime right to buy applications and can help speed up the application process in these cases.
Finally, do remember to check if a client will qualify for the Stamp Duty exemption which is available on properties worth less than £150,000 in the 2000 designated deprived areas. If a client has paid Stamp Duty unnecessarily in the past, they only have two years to claim a discount if one is due.
What does the future look like for the right to buy market?
The future of the right to buy market is firmly in Government hands and the Government has mixed views about its value.
On the one hand, the right to buy scheme is estimated to have contributed £20m to Treasury coffers, but on the other hand there is concern the scheme is undermining Government targets for affordable homes, particularly in the South East.
The Government has proposed various changes to the scheme in its draft Housing Bill, which includes raising the qualifying period from two to five years and extending the discount payback period after the sale from three to five years. This follows a number of ‘downgrades’ over the years – the maximum discount originally started at £50,000 and was then reduced to £38,000 before being reduced further to its current level. It is inevitable that the number of tenants taking up their rights under the scheme will steadily decline over the course of the next ten years, but there is still a worthwhile market for mortgage brokers to consider.