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

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