Mortgage
calculator: is it better to rent or buy?
To buy or not to buy? You've been renting for years and would love nothing
better than a home of your own - but have no idea whether buying now, in
uncharted economic waters, would be a disaster or a brilliant move. Or even
if it would be possible, given the mortgage drought and the state of your
savings account.
The Government says that it would like to help you, but you remain
unconvinced. First-time buyers in London, for example, where the average
house price is £348,366, will not be impressed with Alistair Darling's stamp
duty holiday for purchases under £175,000. And as for affordable
housing...doesn't that mean part-renting a glorified council house?
Not quite. If you can find a deal and a home to suit you, there has arguably
never been a better time to buy into an affordable housing scheme, because
the risk of falling values is partially born by the Government. The detail
is patchy and painfully complex, as Caroline Flint, the Housing Minister,
admitted to The Times in June, and, while the Government claims that anyone
with a household income of under £60,000 is eligible, in reality a strict
order of priority operates, with public sector workers at the top. In brief,
there are four options: a shared-ownership scheme, NewBuild
HomeBuy, where the buyer owns a share (that can be increased) of a new
property - funded by a mortgage - and rents the rest from a housing
association. Stamp duty is only payable once your share reaches 80 per cent
of the total value. The other three schemes are shared equity: the buyer
owns the whole house via a combination of cheap loans and mortgages and
stamp duty is payable. With the Open
Market HomeBuy and MyChoice
HomeBuy shared equity products, the loans are provided by housing
associations and buyers can purchase any property, not just a new-build. In
the final scheme, HomeBuy
Direct, available from early next year on certain new developments, the
loan is provided jointly by the developer and the Government.
Buyers in any of these schemes may repay their loans, remortgage or sell at
any time (subject to valuation fees and early-payment penalties), although
the housing association often has first refusal, at a price determined by an
independent surveyor.
Affordable housing schemes do provide a route into homeownership at a time
when credit is in short supply. The crucial benefits for buyers right now
are that housing associations have good relationships with banks, meaning
that finance is easier to come by, especially as you are borrowing a reduced
proportion of the value. Also, the second tier loans from housing
associations provide a buffer against negative equity. The value of a
shared-equity loan fluctuates with the market, so when prices fall the buyer
has less to repay, which is handy if you lose your job and have to sell just
as values are falling. Conversely, if the value of your property increases,
you end up paying the Government more than you borrowed.
A downside of the market slump is that getting your hands on an affordable
property is becoming increasingly difficult as builders are laid off and
supply shrinks. This raises the question whether taxpayers' money would be
better spent on increasing supply than funding the purchase of depreciating
assets by individuals. The Government's target of three million new homes by
2020 relies on a quota of 240,000 new units each year by 2016, including
25,000 new affordable homes a year by 2011. Yet on Monday, the Town and
Country Planning Association claimed that we will need another 500,000 homes
by 2020 to meet demand. Either way, it looks unlikely. Savills estimates
that housebuilding will fall from 200,000 homes last year to less than
130,000 by the end of 2010.
Much of the affordable housing quotas depend on private developers, which
means they are not being built. Sue Cocking, head of affordable housing at
Knight Frank, says, “We're working on a number of planning consents which we
know can't be implemented because of the onerous affordable housing
requirement. Not only are developers getting less profit from private sales,
but housing associations are now saying they can't buy any more properties
from private developers because they are reluctant to expose themselves to
market risks. So unless the Government acts to fill that funding gap,
provision of affordable housing is going to shrink.”
Unsurprisingly, the sales director of one housing association is more
optimistic. Mark Vaughan, of Notting
Hill Home Ownership, says: “It's a good time for housing associations.
Government subsidies mean they can benefit from the current lack of
competition from private developers. They can get capital and are in a very
healthy position to pick and choose land that comes up. Our completion
levels are constant and our build programme is the same: we hope to sell 400
new units this year in London. People still want to buy, particularly in
London, where private rent is very expensive.” However, he is critical of
shared-equity schemes that involve private developers: “Government products
give you as long as you need to pay back the loan, but some developers offer
25 per cent off for ten years as a sort of shared-equity loan, and it can be
very hard to pay back.”
Sue Cocking points to the new HomeBuy Direct product, where the loan is
jointly funded by the developer and the Government, as one to avoid. “There
is a risk that a government loan of 30 per cent will be used by the
developer to inflate the price,” she says. “Who is the Government trying to
help here? This will do more for the housebuilding industry than for people
trying to buy homes. It is crucial that the loan element should be separated
from the property's price.”
So should you buy now? Yes, says Vaughan, “if you can't get a mortgage on a
private property. Some lenders are still offering our buyers 100 per cent
because it's a smaller amount of money and we offer particular safeguards
that are not available in the private sector. If you are at risk of
repossession, we have a flexible tenure clause in the lease which means we
can buy back your shares and you become a tenant. You can then repurchase
shares when you can afford to. Falling values also mean you can buy more
shares in your home very cheaply, so we anticipate a huge demand when prices
start to rise.”
Cocking has some reservations. “I do think this is a good time to buy into
affordable housing because it's easier to get a mortgage and you are partly
protected from risk. However, taking a long-term view, you should still buy
privately if you can manage it, to avoid having to share any profit with the
Government.”
She also queries whether the current level of government subsidy can make any
real impact, pointing out that the “tiny” scale means that “it will only
make a very small difference”. And the question remains as to whether
subsidising housing is a good idea in the first place: “Subsidy works
against the market correction,” Cocking says, “which some would say we
should allow to happen as fast as possible.” After all, there's nothing like
a recession for making houses cheap.
For further details, go to: www.communities.gov.uk/housing/buyingselling/ownershipschemes/homebuy/contactyourlocal/
Fast facts
Q What is affordable housing and does it apply to me?
A If you are an aspiring first-time buyer with a household income under
£60,000, you are “eligible to apply” for a government subsidy.
Q I think I fit the bill: so what's on offer?
A There are two schemes, neither of which require a deposit. The first is
shared ownership, or New Build HomeBuy: buy a 25 to 75 per cent share (which
you can later increase) of a new home, pay no stamp duty, and rent the rest.
The second, shared equity, has three options: MyChoice HomeBuy - borrow 15
to 50 per cent of the value of any property from a housing association, and
buy the remainder using a mortgage; Ownhome - borrow 20 to 40 per cent from
one housing association, Places for People, and buy the remainder using a
mortgage from the Co-operative Bank; and from early 2009, HomeBuy Direct -
borrow up to 30 per cent of the value of a new home from the developer and
Government, and mortgage the rest.
Q Are there any drawbacks?
A Any change in the value of the property must be shared with the Government
when you sell: great in a falling market but not in a rising one.
Case studies
1 Shared ownerships
Geraldine Provost bought a 40 per cent share in a one-bedroom flat at the 661
London Road development in Hounslow, West London, pictured right, in October
2007. Provost, 29, who works for a travel website, had felt “trapped”
renting a tiny studio in nearby Brentford. She now pays £300 a month in rent
to a housing association, Notting Hill Home Ownership, on the portion that
she does not own. That the value has since gone down does not concern her.
“It's better to lose 20 per cent of a 40 per cent share than 20 per cent of
the total value. I love having my own home. People used to think shared
ownership meant bad quality, but it's not true.” www.nottinghillhousing.org.uk
2 Rent-to-buy
Noel Billington, 26, is buying his first flat, at The Room in Preston,
Lancashire, through a rent-to-buy scheme offered by the developer, Downtown
Living. He works as an auto electrician, and has been renting privately in
Preston for two years. The Room is a new-build development in the city
centre, with 85 one and two-bedroom flats.
“I am buying a one-bedroom flat of 526sq ft. The purchase price is £125,000.
There is an optional secure underground parking space for £10,000, which I
am having too as I have a works van. The flat should be ready to move into
next month, and I will rent it for 18 months, at £580 a month, which also
covers the car park. There is a service charge of £42 a month for the
cleaning and maintenance of the building.
“When the 18 months is up, the service charge will be deducted, and all the
money that is left will go towards the deposit on the flat. I had already
saved up £13,000 to put down, but I couldn't get a mortgage for more than 75
per cent of the purchase price. I must say I was surprised, because I
thought my deposit wasn't bad. However, when I went to a few high street
banks they told me that, although I could get a 90 per cent mortgage if I
was buying a house, buying an apartment is considered higher risk so 75 per
cent is the limit. I anticipate that I will be able to save up some more
money before I have the option to buy, so I should end up with a deposit of
about £30,000. The mortgage will be for just over £100,000, which is worked
out on a multiple of 3 times my income.
“What this deal does is buy time to save. It also means that my rent is not
dead money, as I'm paying it with a real purpose. It is a case of ownership
- in the end, the flat will be mine to do what I want with.
“I was attracted to the development because of the rent-mortgage arrangement,
but also the flat did have everything I need. It comes with a fully fitted
kitchen, there is an open-plan lounge with a balcony off it, and another
balcony off the bedroom. I got a choice of flooring, either carpet or
laminate, a choice of blinds, and the walls will be painted neutral white
and magnolia. Also, I like the renting- first idea because it allows you a
little time to adapt to your new flat. When the 18 months is up you can
change your mind and decide not to purchase. There is nothing to tie you
into buying it if you think it's not for you after all.
The first time I went into the place I thought, ‘It's a shame that the
Government can't come up with something like this to help other first-time
buyers'. For people with no deposit, and because there are no 100 per cent
mortgages any more, just the fact of getting a mortgage is a massive
challenge.”
For more information on The Room call 0845 8437666, or visit www.theroomapartments.com
3 Shared equity
Charlotte Livingstone, 23, an events co-ordinator, bought a two-bedroom house
in Wetherby, West Yorkshire, with her partner in August, using the Ownhome
shared equity scheme. The couple took out a loan of 40 per cent of the
£180,000 value from a housing association, Places for People, and a 60 per
cent mortgage with the Co-operative Bank. “Wetherby is very expensive and we
would have found it hard to get a full mortgage,” she explains. “We will
start paying back the loan when the interest kicks in in five years' time.” www.ownhome.co.uk
