Published 2 March 2020 · Last reviewed 10 March 2020 · Older article — see current rates
Lets answer some of your Right to Buy Mortgage questions
Follow my recent youtube video which can be seen by clicking here a whole host of questions where asked by prospective Righ to Buy Mortgage clients so I thought I do another video and blog post to try to answer some of the key points.
The following Right to Buy Mortgage questions and answers have been based on a case study to bring responses to life. All persons mentioned are fictional.
Case study: Marjorie Smith lives and rents her council flat overlooking the Thames with her Son, Michael, and has done so for a number of years. She has recently received a Section 125 notice Right to Buy Offer letter in the post. This has granted permission for her council home worth £200,000 to be bought off the local authority at a reduced price off £150,000. Marjorie has a large balance on her catalogue account. Michael hasn’t always conducted himself or his finances well. Marjorie’s other Son Jeff lives with his Father.
[toggle title=”Q: What is the maximum amount of discount off the “open market value” that a local authority will grant? “]A: £110,500 in tax year 19/20. This figure applies to London, everywhere else it’s capped at £82,800. In the Smith’s case this is £50,000.[/toggle]
[toggle title=”Q: What affects the amount a local authority offered as Right to Buy Discount to The Smiths? “]A: The Right to Buy discount amount was based on a combination of 3 factors:
– the value of their home
– the length of time they’d been council tenants
– and the fact they were buying flat rather than a house
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[toggle title=”Q: How much of a deposit will you have to put in from your own resources to purchase a Right to Buy property using a mortgage? “]A: This will depend on the Mortgage Lender you have chosen to use. The majority will not want a deposit but some many want to put in five percent. As Michael has had missed payments on his mobile phone contract it is more likely a deposit will be needed.
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[toggle title=”Q: Can a Right to Buy Flat be let out? Michael has a plan to purchase the property using a Right to Buy Offer and then let the property out. He then plans for him and his Mother to continue to rent but elsewhere. Is this possible? “]A: No, a Right to Buy purchase is designed to encourage home ownership rather than an investment. If it is used for buy to let purposes in the first five years of purchase then the local authority is well within its rights to say the contract has been broken and seek compensation, usually in the form of a reclaim of a proportion of the original discount granted.
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[toggle title=”Q: If letting is out the window can the Right to Buy property be sold to anyone if it’s purchased? Michael has asked, so he can sell the property and make a quick turn? “]A: If sold with the first ten years there is often a stipulation that you have to offer the local authority the first option to buy the property back. If they do not exercise the option within a set period (typically 8 weeks), then you are free to sell to anyone.
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[toggle title=”Q: Can the local authority refuse to make a Right to Buy Offer available to council tenants? “]A: If the qualification rules are met then an Offer should be made available. In the case of The Smiths this was touch and go due to Michael’s past anti-social behaviour.
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[toggle title=”Q: Is the amount you can borrow on a Right to Buy limited to the discounted purchase price? The Smiths ideally want more. “]A: There are some UK Mortgage Lenders that will allow you to borrow above the discounted purchase price this is likely to be capped at a certain loan-to-value limit. This can be as high as 90% of the open market value, so in the case of The Smiths this would be £180,000, so a £30,000 extra. Permission for this additional borrowing would need to be approved by the local authority too.
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[toggle title=”Q: Can the money raised on a Right to Buy above the discounted purchase price be used for any purpose? The Smiths want a new BMW and kitchen. “]A: This will be limited to home improvements with potentially a tiny tolerance for the inclusion of legal fees. So new kitchen “yes”, but “no” to the car.
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[toggle title=”Q: Do all Right to Buy Mortgage Lenders lend on flats?”]A: No, surprisingly not, and those that do often limit the number of storeys in the block to 5, and may insist on a working lift. This means the Smiths will be limited on choice.
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[toggle title=”Q: Are all Right to Buy blocks of flats mortgagable?”]A: Cladding and type of construction plays a part. The percentage that are already privately owned and the height of the block, also have a bearing on whether a Mortgage Lender will lend.
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[toggle title=”Q: What is deck access? Will Mortgage Lenders like on blocks like these?”]A: It is an outside gangway corridor to the entrances of flats. This is the place where Michael keeps his scooter and Marjorie hangs out her washing. The answer is: the Mortgage Lenders are few and far between but it’s not impossible. In this instance I suggest you speak to a professional Mortgage Broker, such as Niche Advice.
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[toggle title=”Q: Will credit problems prevent a Right to Buy Mortgage being available?”]A: No, just like normal mortgages there are Right to Buy Mortgage Lenders willing to take on customers with: CCJs, defaults, late payments on credit commitments; pay day loans; discharge bankruptcies; debt management plans, and IVAs. So Michael’s problems with his mobile phone are not a great concern as there should be options.
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[toggle title=”Q: Will criminal records prevent a Right to Buy Mortgage being available?”]A: The criminal record must be fully spent. So if you are, like Michael out of prison “on tag” for his assault case, then he could only apply once the licence term has run its full course.
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[toggle title=”Q: Does age affect you getting a Right to Buy mortgage?”]A: Yes, most Mortgage Lenders will want the mortgage term to finish before you retire and your earnings drop. This could be state retirement age or a time such as seventy or seventy-five when you are able to continue your occupation too. The Mortgage Lenders would naturally expect manual work to finish earlier than a desk job. If you have a high private pension then perhaps this duration could be extended. If you are only using the income from the lowest earner, in our case Michael, then there are some Mortgage Lenders that will work off his age rather than Marjorie’s.
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[toggle title=”Q: Can someone act as a “guarantor” for a Right to Buy Mortgage?”]A: No, you would need to be named on the Right to Buy Offer (Sector 125 papers) and live at the property. So Jeff, who has a well-paid job, and lives with his Dad cannot help out.
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[toggle title=”Q: Can someone who lives at the property but is NOT on the Right to Buy Offer (Sector 125 papers) go on the mortgage?”]A: I’m only aware of one Mortgage Lender that offers a mortgage on this basis. The property must be a house so in the case of The Smiths this is not viable.
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[toggle title=”Q: Can you remortgage a Right to Buy within the discount reclaim (pre-emption period)?”]A: The Right to Buy discount reclaim period (otherwise known as the pre emption period) normally lasts for 5 years, most Mortgage Lenders will allow you to remortgage in this period for a straight balance transfer for a better interest rate. If you looking to raise money then this is normally this is limited for the purpose of home improvements only.
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[toggle title=”Q: Can you raise money for anything other than home improvements on a Right to Buy within the pre emption period? Say to consolidate Marjorie’s catalogue debt? “]A: Yes, but this is would need to be on a second charge basis and importantly with the express permission of the local authority. First charge lenders will almost certainly limit borrowing to home improvements.
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[toggle title=”: Are the mortgage interest rates higher for Right to Buys? Say to consolidate Marjorie’s catalogue debt? “]A: No, not necessarily. And, although everyone’s circumstances are different five year fixed rates are often a sensible idea as this sets your monthly payments for the duration of the pre-emption period.
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[toggle title=”:Q: Do self employed mortgages exist for Right to Buys? Say to consolidate Marjorie’s catalogue debt? “]A: Yes, provided you have made a tax return for at least a year there are options. Michael’s record stall on the market is a prime example.
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[toggle title=”:Q: Has Right to Buy been rolled out nationwide? “]A: At the moment Right to Buy is only available in England and Wales only – Right to Buy ended for all council and housing association tenants in Scotland on 1 August 2016
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