July 22nd, 2010 HIP-Consultant.co.uk Posted in Mortgages, Top Tips | 2 Comments »

The Right to Buy scheme, introduced under the Housing Act 1985, is a great way for council tenants to climb that all important first rung of the property ladder. It allows a qualifying tenant to purchase their council property at a significant discount.

Tenants who could not otherwise afford to buy their own may find they are able to purchase their council property and it is surprising how affordable this can be, with the mortgage repayments sometimes being no more than the current rent.

Who is Eligible to Apply For the Right to Buy

Anyone who has been a council tenant for a continuous period of 5 years or more can qualify for the right to buy. A tenant of a registered social landlord, who became their tenant as a result of the property being transferred from the local authority, may also qualify. The tenant does not have to have occupied the property he wishes to buy for the full 5 year period, so long as he has been a tenant of some other council property.

Calculating the Right to Buy Discount

The amount of discount offered depends on the length of time the applicant has been a public sector tenant, and whether the property is a house or a flat. The table below shows how the discount is calculated:

Houses Flats Tenancies commenced prior to 18th January 2005 Tenancies commenced after 18th January 2005 Tenancies commenced prior to 18th January 2005 Tenancies commenced after 18th January 2005 Length of tenancy (years) % Discount Length of tenancy (years) % Discount Length of tenancy (years) % Discount Length of tenancy (years) % Discount 2 32 5 35 2 44 5 50 3 33 6 36 3 46 6 52 4 34 7 37 4 48 7 54 5 35 8 38 5 50 8 56 6 36 9 39 6 52 9 58 7 37 10 40 7 54 10 60 8 38 11 41 8 56 11 62 9 39 12 42 9 58 12 64 10 40 13 43 10 60 13 66 11 41 14 44 11 62 14 68 12 42 15 45 12 64 15 70 13 43 16 46 13 66 14 44 17 47 14 68 15 45 18 48 15 70 16 46 19 49 N/A 17 47 20 50 18 48 21 51 19 49 22 52 20 50 23 53 21 51 24 54 22 52 25 55 23 53 26 56 24 54 27 57 25 55 28 58 26 56 29 59 27 57 30 60 28 58 29 59 30 60

There are three further considerations. First, if the landlord has recently purchased, built or refurbished the property then the amount the tenant pays cannot be less than the amount the landlord expended.

This figure is known as the “cost floor”. Second, if the tenant has previously bought a property under the Right to Buy legislation and has received a discount, the amount of that discount (less any amount subsequently repaid) will be deducted from the discount that would normally be due. Finally, each local authority area sets a maximum discount (in £) that a tenant can receive, so for example a tenant of house who has been a public sector tenant for 25 years would be entitled to a 55% discount, therefore if the property was valued at £100,000 he may expect to receive a £55,000 discount however if the maximum discount for the area is, say, £40,000 then this is all he will receive and he will have to pay £60,000. The table below shows the current (as at 07.07.2010) maximum discounts:

Region Maximum Discount Region Maximum Discount Chiltern, Epsom & Ewell, Hart, Oxford, Reading, Reigate & Banstead, Tonbridge & Malling, Vale of the White Horse, West Berkshire £16,000 East Midlands, Yorkshire and the Humber £24,000 Remainder of the South East Region £38,000 North East £22,000 Watford £16,000 Wales £16,000 Remainder of the Eastern Region £34,000 Barking & Dagenham, Havering £38,000 South West £30,000 Remainder of London £16,000 North West and the West Midlands £26,000

Making the Application to Buy your Council House/Flat

The application should be made to the local authority using form RTB1 (downloaded from the DirectGov website – the Right to Buy scheme)You’ll need to fill in your personal details and state how long you have lived at the property or other council property. You will need to be the tenant (or one of the tenants) i.e. you will need to be named on the rent card. If you are not the only tenant then either the other tenants will need to join in the purchase or else they will need to consent to your purchase as the tenancy will come to an end on completion.

Once completed the the application should be sent by recorded delivery, or hand delivered, to your landlord, who must then respond within 4 weeks, in form RTB2, advising whether they accept that you are eligible for the right to buy.

Right to Buy Section 125 Notice

If the landlord agrees that you have the right to buy he should, within 8 weeks (for houses) or 12 weeks (for flats) issue a Section 125 Notice, setting out the valuation of the property, the amount of discount you will receive, any structural defects of which the landlord is aware, an estimate of the likely service charges which will be payable over the next 5 years (for flats only) and enclosing a draft of the proposed transfer or lease.

If you do not agree with the landlord’s valuation then you have the right to refer the matter to the District Valuer for arbitration (you will need to apply through your landlord). The District Valuer’s decision is final and binding however, even if he values the property higher than the landlord. When valuing the property the council must not take account of any improvements which you have made.

Repaying the Discount

Once you’ve purchased the property, if you should then sell within 5 years you will need to repay some or all of the discount. To prevent you from selling without the council’s knowledge there will be a charge registered against the property in favour of the council.

The formula to calculate the amount of discount that will need to be repaid is as follows:

((sp / ov ) * od) / 5 * n = dr, where sp is the sale price, ov is the original value (i.e. what would have been paid if there was no discount when purchased), od is tr original discount amount in £s, n is the number of years (including part years) remaining of the 5 year discount period and dr is the discount which is repayable on sale. For example, if a property was valued at £250,000 and purchased for £225,000 (so with a 10% discount), then sold 2 years and 3 months later for £275,000, the calculation would be:

((275000 / 250000) * 25000) / 5 * 3 = 16500

The reason n is equal to 3 is because there are two full years of the discount period left and 1 part year, which counts as a full year. As can be seen, the discount repayable reduces by a fifth after every complete year that elapses but rather than being a fixed sum it is a percentage of the eventual sale price.

When the property is sold, your solicitor will arrange for payment of the discount from the proceeds of the sale. If there is not enough equity to repay the discount then, just as if there were not enough equity to repay your mortgage, you will not be able to sell.

Remortgaging and Additional Borrowing During the Discount Period

If you wish to remortgage, and take an additional advance from your current lender, during the discount period you must first obtain the consent of the council. This is because they will need to postpone their charge in favour of your lender, otherwise, if the lender were to repossess and sell, they would need to pay the discount to the council from the sale proceeds before taking what was owed to them, which of course increases the risk that they will suffer a loss. If the council’s charge cannot be postponed most lenders will not agree to lend.

Right of First Refusal

Once your purchase is completed, should you wish to sell the property within 10 years of your completion, you will first need to offer it back to the landlord. This is known as the right of first refusal. You’ll need to give the landlord specific pieces of information including how may bedrooms the property has, what type of heating system it has etc. Most landlords will have a standard form of notice for you to use. Once you serve the notice the council have 8 weeks to respond. If they either advise they do not want to buy back, or do not respond at all within 8 weeks, you are free to go ahead and sell. If they do buy the property back they will have to pay you market value, though if you receive an offer from a third party which is greater than market value you will still have to sell to the landlord for the lower price.

What to Do Next

Once you have received the section 125 notice and decided that you are happy to proceed you should instruct a solicitor and supply him with the section 125 notice. He will then complete the conveyancing on your behalf.