Are Tenants in London Better Off renting?

By : Nick Marr

Tenants using government-backed Help To Buy scheme to get on property ladder need annual salary of £75,000 to pay off loan in five years

Tenants in London would be better off continuing to rent rather than use a flagship government scheme designed to help first-time buyers step onto the property ladder.

Denhan Guaranteed Rent says a first-time buyer who uses the London Help To Buy equity loan scheme to borrow the maximum 40% of a £400,000 property would need an annual salary of over £75,000 if they were to pay off the loan by the time the five-year interest-free period came to an end.

The equity loan scheme allows London residents to purchase a new-build home in any of the capital’s 32 boroughs with just a 5% deposit and a 55% mortgage.

However, with new-build homes in London costing around £400,000, most people using the Help To Buy London scheme will need to borrow £160,000 from the government-backed initiative.

That would mean them making 60 payments of £2666.66 to clear the debt before it accrued interest at a starting rate of 1.75% and then increasing each year at the rate of RPI plus 1%.

Estate agents warn Help To Buy borrowers that they must also cover the cost of the 55% mortgage obtained from a commercial lender.

In the case of a £400,000 property, this would mean a commercial mortgage debt of £220,000 and potential interest-only costs of £550 per month if the home loan carried a 3% interest rate.

Once living costs are added to the financial calculations, the purchaser of the £400,000 Help To Buy property would need to take home at least £4250 per month – the equivalent of an annual salary of £75,075, says Wimbledon estate agent Robert Holmes & Co.

And if borrowers fail to clear the Help To Buy debt before selling the property, the terms of the scheme mean they could end up paying back far more than the original £160,000 loan.

This is because the 40% equity in the property remains fixed, so the government would demand this percentage of any future sale price. If, for example, the property was sold for £600,000 before the 40% equity loan was repaid, the seller would repay £240,000 to the government.

The Department for Communities and Local Government – the body that operates the Help To Buy equity loan scheme – says it has helped almost 300,000 people onto the housing ladder since it was introduced in 2010.

A DCLG spokesman also points out that borrowers are not forced to repay the 40% equity within five years and charges made after that time are “significantly less” than the interest paid on a typical mortgage from a commercial lender.

However, north-west London-based letting agent Paramount Properties says renting could be a better option for younger people.

Rents for a one double bedroom flat in West Hampstead start about £300 per week – less than half the cost of a £400,000 Help To Buy property.

The many advantages of renting include the ability to move out of the property at the end of the Shorthold Tenancy Agreement if your personal circumstances change, such as changing jobs, meeting a partner or having children.

Buying a property is a huge commitment that is not right for everybody, depending on the stage of life they are at, the spokesman adds.