Abby asks: “I’m 24 and live in a 2 bed flat in South London. I’m starting to wonder if it’s worth taking advantage of the Right To Buy scheme, but it sounds too good to be true. There’s got to be something I’m missing?”
Question 27 – Can I Benefit From The Right To Buy Scheme? – Shownotes
Today’s question comes from Abby, and it’s a long one:
I’m 24 and live with my mum and two brothers in a 2 bed flat in South London. I earn ~£40,000 and my mum earns ~£25,000.
Looking at the local area, our council flat is worth around £250,000 and we’ve been here for 10+ years so are entitled to the full right to buy discount.
I’m starting to wonder if it’s worth us taking advantage of the right to buy scheme and buying the flat, paying the mortgage for 5 years and selling it straight away and pocketing the discount.
Seems that the Gov effectively want to give us the 100k discount if we pay a mortgage instead of rent for 5 years. I did originally want to buy my own place but I don’t think that’s feasible since I am tied to a London address for my job and don’t have a huge amount of savings.
If we were to buy the flat I’d probably look to rent a room for the near future and continue to pay half the mortgage for the flat. Mum wants to leave London in the future, at which point I’d move into the flat, pay the mortgage and run out the clock on the remaining time to earn the discount.
When the flat was sold we’d split up any “profit” between us and I can finally buy my own place! This all sounds too good to be true. There’s got to be something I’m missing?
Thanks for your question Abby.
A fairly long question that can be summarised into:
- Do I have the right to buy?
- Can I get a mortgage?
- Is this a good idea financially?
1. What Is The Right To Buy Scheme?
First of all, we need to make sure that we understand the “Right to Buy” scheme. The scheme allows most council tenants to buy their council house at a discount. The rules are that you can use Right To Buy if:
- it’s your only or main home
- it’s self-contained
- you’re a secure tenant
- you’ve had a public sector landlord (eg a council, housing association or NHS trust) for 3 years
It sounds like you meet all of these rules. Then, you said that you want to apply with your Mum, so we need to look at the rules for joint applications:
You can make a joint application with:
- someone who shares your tenancy
- up to 3 family members who’ve lived with you for the past 12 months (even if they don’t share your tenancy)
Another tick in your situation.
The scheme allows you to buy at a discount at market value. This discount is limited to £77,900 across England and £103,900 in London boroughs. You can then use the government’s Right To Buy Calculator. Using your figures (and the fact that it is a house that you’ve lived in for 10 years) the Right To Buy discount is given as 60%, and so based on the £250k house, the discount will be capped at the £103,900 we previously highlighted for London boroughs.
2. Can You Get A Mortgage?
This brings us onto part two of your question: Can You Get A Mortgage?
You and your Mum earn a combined £65,000.
Because your house is valued at £250k, but you will only need the mortgage to be £150k, most lender will take the £100k right to buy discount as your deposit. Therefore, you should be able to secure 60% LTV mortgage for the £150k and not need to physically pay a deposit.
Therefore, unless you have very high expenses, this should also mean that you have sufficient income to get a mortgage at this level, as the £150k is only around 2.3 times your income.
To find the best mortgage is this situation, I would recommend seeing a whole of market independent mortgage advisor, who will help you with your specific circumstances.
3. Is It A Good Decision Financially?
The last part of your question is whether this is a good move financially. The first factor in determining that is to understand whether you can meet the payments that will be due.
Before looking at monthly payments, there will be legal fees, survey fees, valuation fees, mortgage arrangement fees, fees for searches, and stamp duty to pay when you buy. You need to make sure you have enough money saved up to cover all of that.
Then, you need to make sure that you can afford your monthly repayments. On a 25 year £150k mortgage, with interest rates at 5% as a stress test, that would be mean monthly repayments of £877 per month. However, the costs don’t end up there. You’ll have council tax, water charges, insurance, repairs & maintenance and service charges to pay, which you may not have had in the past.
If you do decide that this is all manageable for you and your family in the short term, then you should work your way through the government’s Right To Buy guide.
It is also worth noting that once you buy the house, you can sell it whenever you like, but if you wish to sell within the discount repayment period (5 years), you’ll have to repay a pro-rata amount of the discount. So, in your scenario, if you sold after 3 years, you’d have to repay 3/5 x £100k = £60k.
Right To Buy Scheme – Conclusion
If you can afford to buy the house and service all the additional payments that come with it, this could be one of the best financial decisions that you make.
Assuming conservative figures that the property doesn’t change in value between now and 5 years’ time, you’ll be making the £100k profit on an investment of only a few thousand for the fees and stamp duty (as you didn’t actually put your own deposit down).
If house prices increase by 5% per year in the next five years, you’ll have a property worth around £320,000, meaning another £70,000 profit on that very small investment.
So, be sure that you can afford it between yourself and your Mum (and consult with your two brothers as well), and read the government guidance slowly and then this could indeed be an excellent investment for you and your family.
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