Financing Right to Buy Property

by Mark Johnston

The right to buy scheme is little understood and it is this lack of understanding that prevents many tenants from potentially getting their first foothold on to the property ladder.

The scheme allows social tenants to purchase their own homes at a discounted rate in England and Wales, providing they have been a tenant for at least 2 years.

New government plans to increase the discount rate cap to £50,000 is likely to see an increase in right to buy sales; however, figures have shown that the national average discount now required by tenants is at least 40% or £50,800 in order to make the scheme affordable for all.

Unless tenants can buy their homes outright with cash, they will need to borrow money through a mortgage.

According to property analytics business Hometrack, only a small minority of tenants are likely to be eligible for a mortgage, as only around 20% of them are in full time work.

The mortgage market review (MMR) also found that right to buy borrowers in particular are more likely to end up in arrears or even face repossession and therefore the need for proper financial advice and affordability assessments are vital, especially if tenants are to take up the offer of right to buy in a sustainable manner.

Richard Donnell, director of research at Hometrack, suggests “overall the government has taken a cautious approach with its proposals. The hope will be that qualifying households on higher incomes in higher value areas will generate capital with out a major loss of stock”.

Data has shown that 38% of social tenants are well off enough not to need housing benefit and over 80,000 tenants are in full time work. Therefore meaning many social tenants will be able to meet the cost of a mortgage.

Not all lenders will lend right to buy mortgages, but there are still a number of lenders that will lend on normal terms.

Right to buy tenants buy their homes with significant discounts and therefore this helps to reduce the risk to lenders because the mortgage is a lower proportion of the value of the house.

The key figures when looking at right to buy mortgage quotes are the open market value (OMV) and also the discounted price that the tenant will have to pay in order to buy the property (RTB price).

Most mortgage lenders that will lend on these particular properties will lend up to 95% or 100% of the right to buy price. When calculating the loan to value (LTV) on these properties the lenders use the open market value (OMV). This means for example, if a tenant’s council house has an open market value (OMV) of £100,000 and the right to buy price is £75,000 the property would have a 75% loan to value (LTV) rate.

The paper work for a right to buy mortgage may be slightly different from a conventional mortgage, but lenders still offer the same schemes, such as fixed, discounted, tracker and variable.

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