First-time buyers looking to get on the property ladder without a conventional mortgage now have the option of an innovative new scheme from Way Home. Albeit, with a significant stamp duty catch and major restrictions on subsequent home improvements,
The new scheme will enable first-time buyers to purchase a property with a 5% deposit without having to obtain a mortgage. Announcing the initiative, Way Home said it will form partnerships with home buyers on their purchases, with the buyer responsible for paying a deposit of 5% to 30% and the company covering the rest of the costs.
After this, the buyer pays a monthly rent to Way Home on the basis of the outstanding amount, rising annually in accordance with inflation. The buyer will also have the opportunity to pay lump sums to Way home to increase the share of the property they own over time.
It is essentially a slightly new take on the classic rent-to-buy model, where the ‘buyer’ makes a continuous series of payments to increase their ownership stake in the property. But with 5% deposit mortgages now available on the High Street, under what circumstances would a rent-to-buy agreement with Way home be preferable?
A case of qualification criteria and loan size
Quizzed on the benefits of the scheme, Nigel Purves, chief executive of Way home, says applicants will be able to borrow much more than would be possible with a conventional lender.
With most high-street loans, first-time buyers are restricted to no more than around 4.5 times their annual income. With the Way home scheme, they will have the opportunity to move into homes valued at up to eight times their annual income.
This could subsequently give first-timers the buying power to move into much more desirable homes rather than settle for basic ‘ starter homes’ on the basis of affordability.
According to Way home, properties eligible under the scheme will be priced between £200,000 and £500,000, in a guaranteed good state of repair, and will require no major building works or alterations. They will also be located exclusively in desirable areas in 41 locations across the country.
“If you can get the size of home you want in the location you want with a mortgage of four times your income, we tell people that, obviously, they should take advice, but that is something they should probably do if they can,” commented Nigel Purves.
“The problem is that most of our customers are living in areas where properties are six to seven times their income or more, and the only way to bridge that gap is by saving for decades or having family members able to help you, which of course most people don’t have.”
Terms and conditions apply
As for the catch, various restrictions will be placed on those purchasing properties under the Way home scheme. For example, major renovations and structural adjustments to properties will not be permitted, such as putting in a new kitchen or building a conservatory.
In addition, buyers will face top-band stamp duty liability, the same as if they were purchasing a second home. In addition, Way home will only allow its customers to build a maximum 40% stake in the property they live on.
“We expect there will be some people who see it as a way to access a property now that they would only have been able to get with a mortgage in ten years’ time: they will chip away at the equity and their salary may increase, and eventually they will be able to get a conventional mortgage and buy us out,” Purves explains.
“Others we think will find during that time period that they might want to change location, they might want to move to somewhere less built-up, maybe where their income to value ratio is lower, and therefore they will ask us to buy their stake back off them, and they will go and buy a home somewhere else.”