First-time buyers could buy a home with a 5 per cent deposit and no mortgage under a new rent-to-own scheme – though they will need to pay the same rate of stamp duty as those buying a second home.
Wayhome is a property company backed by a £500million investment from pension funds, which will partner with home buyers on their purchases with the buyer paying a cash deposit of between 5 per cent and 30 per cent and the company fronting the rest.
The buyer then pays rent to Wayhome on the rest of the property, which rises annually with inflation, and can pay lump sums to increase their share over time.
Rent-to-buy scheme, Wayhome, buys homes alongside first-time buyers to help them get on the ladder – but there are several restrictions they should know about.
Wayhome says ‘hundreds’ of potential buyers are already viewing properties with a view to using the scheme, and there are five buyers who have already had offers accepted.
However, the small print surrounding the scheme includes some potentially costly charges and penalties, which we explain below.
The company is part of Unmortgage Group, which first set about creating a similar scheme called ‘Unmortgage’ back in 2019 but is now being relaunched under a new name.
As the scheme involves paying a deposit equal to 5 per cent of a home’s value, the first question to ask is why Wayhome is better than taking out a 95 per cent mortgage and buying a home outright.
Nigel Purves, chief executive of Wayhome, says it will allow buyers to take on properties worth six to eight times their annual income, whereas most mortgage lenders only allow first-time buyers to borrow between 3.5 and 4.5 times.
This means they could live in larger homes in more desirable areas than the typical ‘starter home’ – though rent payments could be higher than mortgage interest.
Wayhome will buy homes priced between £200,000 and £500,000, which are in good structural condition with no building work needed, have between two and five bedrooms and well-sized living spaces, and are situated in desirable areas. It will not buy any new builds.
It is currently active in 41 locations including the outskirts of London, the Home Counties, the South Coast, Bristol, Leeds and Manchester.
Wayhome offers a way to part-own a home without taking out a mortgage
Nigel Purves, chief executive of Wayhome, told This is Money it was intended as a ‘bridge between renting and owning with a conventional mortgage.’
‘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.
‘The problem is that most of our customers are living in areas where properties are six, seven times’ 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.’
Customers applying to use Wayhome will need to be aged between 21 and 55, have a household income of at least £30,000 and not above £140,000, pass a credit check and not own another home.
The scheme is designed for people who can’t get a traditional mortgage because their deposit or salary is too low, and Wayhome says half of the 80,000 people who have registered an interest so far are key workers.
What are the restrictions?
There are some important restrictions anyone considering the scheme should know about – and they should also seek independent advice before committing to it.
The biggest of these relates to stamp duty. While first-time buyers typically don’t pay any stamp duty on purchases under £300,000, those using Wayhome after the stamp duty holiday ends on 30 September will pay the 3 per cent rate usually charged to second home buyers and property investors.
This is because they are buying their home in a limited liability partnership with Wayhome’s institutional investors, which include Allianz GI and pension funds, who have invested £500million in the company in order for it to buy its first homes.
They only pay the proportion of the stamp duty based on the proportion of the home they are buying, so a buyer putting down a 5 per cent deposit would pay 5 per cent of the total stamp duty bill.
So for example, a buyer purchasing a 5 per cent stake of a £300,000 home for £15,000, would pay a stamp duty bill of £450.
However, if they were to up their ownership, they would have to pay the extra – so if they wanted to up their stake by 5 per cent each year for five years, it would amount to a total of £2250.
Buyers can refurbish their home… to a degree
There are also some restrictions when it comes to how Wayhome buyers are allowed to alter their properties, both inside and out.
While homeowners are allowed to redecorate and furnish their homes how they want, they are not allowed to carry out extensions or put in a new kitchen.
When it comes to repairs, the homeowners will pay the cost of any day-to-day maintenance such as replacing furniture.
They will split the cost of buildings insurance and emergency maintenance cover with the investor, so someone owning a 5 per cent share would pay 5 per cent, and the same for things like replacing the boiler.
As long as they keep paying their rent and keeping to the terms of their contract, Wayhome says owners cannot be asked to leave.
What happens if buyers want to leave?
Another restriction for buyers is that they will only be able to build up a maximum 40 per cent share in the home.
After that they can stay and pay rent on the remaining 60 per cent, buy Wayhome’s investors out, or sell their stake back to the investors and leave.
Purves says there are broadly two exit routes for people who use Wayhome.
‘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.
‘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.’
Homeowners will split the cost of their home with an institutional investor
Buying them out would mean using the equity they had built up, along with any other savings, as a deposit and getting a mainstream mortgage.
Homes bought with Wayhome also have an ‘early buyout period’ of between 5 and 10 years. If the buyer decides to buy their home in full during that time, they will need to repay the cost of the property survey and legal fees, which could be thousands of pounds.
If a buyer wants to leave their home, Wayhome’s investors are allowed three months to decide whether they want to buy the resident’s share out, or to put the home on the market.
This incurs a £350 valuation fee either way, and if the investors want to buy the share, they have a further three months to do that – meaning a potential six-month wait for the buyer to be able to move. All selling costs are split based on the share that the buyer owned when they decided to leave.
Because they would still be first-time buyers in the eyes of a mortgage lender, they would probably need to pay a higher interest rate on their next mortgage than the typical second-stepper, and may be able to borrow less.
How are the homes selected?
Wayhome vets all the properties on the market in the area, and those that get through its filter are then advertised to potential buyers on its website.
‘We take in all the properties available in the market and run manual and automated checks behind the scenes to make sure they are the sorts of homes we would buy, cutting out those that are in poor condition and making sure buyers do not overpay,’ says Purves.
Once a buyer sees a home they like, they are able to attend viewings in the normal way – but with Wayhome essentially acting as a buying agent, acting on their behalf in much of the process. This includes handling the bidding.
It also uses its own surveyors and conveyancers and surveyors. The buyer pays a percentage the same as the stake they are purchasing, but they will have to pay the investors back if they move within their early repayment period.
While there are plenty of caveats, Wayhome could work for people in certain circumstances as a bridge between renting and owning, as long as they are clear about the potential fees and charges.
The company certainly has big plans, with Purves saying that it is looking for £10bn of investment over the next five years to buy more homes.
This would allow Wayhome and its investors to buy between 30,000 and 50,000 properties.
How is it different to shared ownership?
Wayhome’s model has some similarities to shared ownership, where buyers purchase part of a home and rent the rest.
However, where shared ownership buyers use a mortgage to buy their owned share, Wayhome buyers pay for it in full.
The advantage of this is that, with Wayhome, a homeowner would not need to make mortgage repayments and pay interest, on top of their rent.
However, being able to use a mortgage means shared ownership buyers can own larger stakes in their homes, paying less money upfront.
Like shared ownership, Wayhome buyers will be able to increase the amount they own over time by ‘staircasing’ or buying a bigger share of their home.
The Wayhome model allows buyers to up their ownership level by as little as £50, and as much as 5 per cent of the property’s value per year, without paying fees.
Shared ownership schemes allow owners to buy a bigger share more quickly.
They are usually also allowed to ‘step up’ once a year, but with a minimum 10 per cent share each time – though the Government has proposed reducing that minimum threshold to 1 per cent.
While Wayhome caps the stake buyers can take on at 40 per cent, most shared ownership schemes allow buyers to ‘staircase’ all the way up to 100 per cent, meaning they can work their way up to full ownership more gradually as their income increases or they save more.
If they staircased by the full 10 per cent each year, they could also own more of their home, more quickly.
However, if their shares are mortgaged, they won’t have the full benefit of the equity in their home.