To Rent or To Buy – That is the Question

Speaking at the RESI conference earlier this month, Housing Minister Gavin Barwell indicated that Theresa May’s government may no longer focus on supporting home ownership. In his speech, Mr Barwell stated, “We need to build more homes of every single type and not focus on one single tenure.”

He also indicated that the Government is considering abandoning its pledge to build 200,000 starter homes by 2020 due to a shift towards supporting the rental sector.

This is a significant change in policy, as in the past, the Conservative government has thrown its weight behind home ownership, often at the expense of developing the rental market. Indeed, many of former Chancellor, George Osborne’s decisions were directly hostile towards landlords, for example, the curtailment of buy-to-let tax relief.

The debate over whether it is better to purchase your own home or be a lifelong renter is an ongoing one. Britain has robust laws to protect tenants, stemming from pre-Word War II times when a majority of the population rented their homes. In fact in 1918, 77% of households were rented, and it was not until 1971 that the percentage of rented and privately-owned households equalised. Home ownership continued to increase from there, reaching a peak of 71% in 2003, however in the last decade it has fallen to 64% and the trend continues to point downwards.

The Right-To-Buy scheme was seen as one of the defining policies of Margaret Thatcher’s government. Launched under the Housing Act 1980, it helped thousands of tenants buy their council homes by offering a discount of 33% on the market value and a guarantee of 100% mortgages from local authorities. Baroness Thatcher was passionate about extending home ownership in Britain, believing it was the key to moral and cohesive family life. Many hard-working families jumped at the chance to get on the property ladder; and seven years after the scheme was introduced home ownership had increased significantly by 9%.

However, home ownership in 2016 looks markedly different to the days of Margaret Thatcher being photographed in snug kitchens with families who had just purchased their former council house. Home ownership rates continue to fall all over the UK. The biggest fall of all has come in Greater Manchester, where the ownership rate has fallen by 14.5 points, from 72.4% in April 2003 to just 57.9% in February 2015.

The drastic drop in home ownership could be attributed to:-

• An increase of 7% in house prices a year since 1980. Wages, however, have not risen at the same rate, and first-time buyers in London are now witnessing average house prices at a record nine times their average wage.
• A sharp decline in the number of first-time buyers. Most lending institutions are demanding a mortgage deposit of at least 20%, which for many young renters is an impossible amount to accrue in savings.
• An acute shortage of homes in the UK. Demand has long outweighed supply, and the UK is simply not building enough homes to meet the needs of a growing population. This in turn has fuelled an almost constant rise in house prices.

There are pros and cons to both buying and renting.

Purchasing your own home provides you with stability (without the risk of eviction by a Landlord) so that you can put down ‘roots’; it allows you to live freely without the rules and constraints of a tenancy agreement (you can paint the walls bright green if you want to!); and it allows you to build up equity in your property and get a return on your investment so that you will ultimately have an asset to pass on to your children. To many, renting is seen as throwing money away.

Renting however gives you the flexibility to move quickly if a new opportunity arises; it removes the burden of costly repairs; and it may enable you to live in a more desirable area than you could afford to buy in.

The UK government runs a number of schemes to assist first-time homebuyers. One of the most popular is the ‘Help to Buy’ scheme which is designed to help those with small deposits to obtain a mortgage. It comprises of three branches:

1. Equity Loans – first-time buyers only need to find a deposit of 5% of the property’s value. The government will then provide an equity loan of a further 20%, meaning you’ll only need to qualify for a 75% mortgage. From February 2016 the government increased the upper limit for the equity loan it gives new home-buyers within Greater London from 20% to 40%. The government loan is interest-free for the first five years.
2. Mortgage Guarantee – first-time buyers must come up with a deposit of between 5 and 20%. The government then guarantees the mortgage lender 15% of the property value. The idea is that, with the extra security, the rate charged on your mortgage will be lower. A Mortgage Guarantee can be obtained for homes worth less than £600,000, but it is only available until 31st December 2016.
3. ISA – the Help to Buy ISA is essentially a tax-free savings top-up scheme. For every £200 you save towards your mortgage deposit, the government will contribute £50. The maximum bonus you can receive is £3,000, which would apply to savings of £12,000.
4. Shared ownership – this works by allowing you to buy a share of between 25 and 75% in your Housing Association home. You then pay rent on the remainder, and you can purchase more shares over time. This is known as ‘staircasing’.

Both landlords and tenants should make themselves aware of the legal rights they have before renting a property. Below are some of most important:

The tenancy agreement

All tenants must be given a copy of a tenancy agreement and the agreement must be updated if the terms of the tenancy change at any point.

The Tenancy Deposit Scheme

A landlord must put your deposit in a government-backed tenancy deposit scheme within 30 days of receiving it.

Repairs and adequate facilities

Tenants have a right to have repairs done within a short space of time and to have adequate facilities for cooking and heating etc.

Repossession

Landlords have the right (as long as they follow correct procedures) to take back possession of their property if the tenant fails to pay rent or breaches a covenant in the Lease (for example, deliberately causes extensive damage).

Inspections

Properties can be inspected by a landlord as long as 24 hours’ notice is given to the tenants.

There is no right or wrong answer as to whether you are better off buying or renting your home. In the U.K., most people aspire to owning their own home, and we feel a great sense of pride when we do finally get on the property ladder. An englishman’s home, as we say, is his castle. However, in other countries such as Germany and Switzerland, life-long renting is very common; in fact, many Europeans are baffled by the British obsession with home ownership.

The government’s latest move to provide more support to the rental market may indicate that it is finally facing the reality that, for many young people, the idea of home ownership is as much of a fantasy now as it was for the majority of those living in 1918.

Saracens Solicitors is a multi-service law firm based in London’s West End. We have dedicated and highly experienced property law solicitors who can assist you with all aspects of buying and/or selling a property, and landlord and tenant issues. For more information, please call our office on 020 3588 3500.