Tens of thousands of young people will be able to rent new homes at below-market rates with the opportunity to buy them at the end of their tenancy, Eric Pickles announced on the 26th of September.

Housing associations and social landlords will be given £400m worth of cheap loans to build new homes under a new ‘Rent to Buy’ scheme. The associations and landlords will have to rent the new houses out at below market rates – capped at 80% of local market value – for seven years. After this period, people will be given the opportunity to buy the homes.

The policy will be aimed at young people trying to build up a deposit to get on the housing ladder rather than those on benefits. The government claims 10,000 new homes will be built under the plans between 2015 and 2017.

According to LSL Property Services, the average rent in the capital in August this year was £1,160 per month. A 20% saving would represent a saving of £232 per month, or £2,784 per year. Over seven years the tenant will have saved £19,488. According to the Office of National Statistics (ONS), the average property price in London in July was £514,000 so even at today’s prices it would equate to having just a 3.8% deposit saved up, assuming the renters have also managed to save at least £20,000 to pay their stamp duty fee. But these seven year tenancies will be expiring in 2022-2024 and who knows what London property will cost by then? In theory then it could be a very profitable deal for the ‘rent to buyer’s’ and being accepted on the scheme will be like winning the lottery, so the number of applicants is likely to be very high.

The Communities Secretary Eric Pickles pointed out that current schemes including the government’s flagship Help to Buy scheme have boosted house building. At the start of September, 48,393 homes had been bought through the Help to Buy equity loan scheme, with 82% of house sales going to first-time buyers.

“Both house building and the number of first time buyers are now at their highest rate since 2007,” Eric Pickles said. “As part of our wider housing programme, this new scheme will help increase the provision of low-cost rented accommodation and provide a springboard for young people to upgrade to home ownership down the line.”

In order to qualify, the household income must be less that £66,000 a year, based on two people earning £33,000 each. Housing associations will have up to 16 years to pay off the low-cost loans and until the loans are repaid, the homes must be made available for affordable rent.

Matt Hutchinson, director of flat-share website SpareRoom.co.uk, says: “In theory, the government’s rent to buy scheme is a good idea. The reality, however, is that even 10,000 homes won’t scratch the surface of a chronic supply problem that is severely impacting renters hoping to get onto the property ladder - particularly in London. 

“Like Help to Buy, it simply doesn’t go far enough. Announcing a new policy to help first time buyers is a handy short-term win for the government, especially with an election looming, but we need to fix the housing crisis for everyone, not just a lucky few. 

“The government needs to think bigger and reach more people. In a climate of short term politics we need a government prepared to make tough decisions - the housing crisis could take a generation to fix. 

“Doing more to encourage homeowners to rent out the estimated 15m empty bedrooms in England alone would have a considerable impact on the supply of affordable rented accommodation for young people.”

On the 1st of October Government published more details of how the scheme will work and the bidding prospectus for the Rent to Buy scheme for 2015 to 2017 has been released, setting out the details of the funding and bidding process. 

The 17-page prospectus invites applicants, such as housing associations, to bid for up to £200m of recoverable loans to support the building of fixed term affordable homes between 2015 and 2017 in London. A separate fund of £200m is also available for homes outside London.  

The loan must be repaid within 16 years but bidders can repay early. Properties must be retained and let at sub-market rent for a minimum of seven years to people who have never owned a home before. If the landlord seeks to sell the property at any time after this period the tenant has a right of first refusal. The tenant can also put in a request to buy their home within this seven year period.

The prospectus invites bids for loan funding to the Homes and Communities Agency via the Investment Management system.