How I got dream £355,000 two-bed house WITHOUT getting a mortgage
SELF-EMPLOYED homebuyers are turning to investing in new property schemes as a way to move up the property ladder.
Tom and Stef Lee, both 31, and daughter Iris, 3, had outgrown their two-bed flat in Surrey and were hunting for a larger “forever” home.
But despite having a £35,000 deposit the couple couldn’t get a mortgage.
Stef had retrained as a self-employed hairdresser and despite having 18 months of accounts they found high street banks would not lend to them.
Searching online for a solution, the couple came across Onstep, a peer-to-peer backed property firm.
It allowed them to move into their dream home – a £325,000 three-bed house in Sussex by paying just a 5% deposit.
Onstep buys the property with a 70% mortgage and investors contribute the remaining value of 25%.
The Lees have to also pay rent of £1,015 a month – but this has been discounted at 10% below the average for the area.
The idea is that you get to live in a home you could otherwise not afford and your “deposit” can go up in value.
You sign up for a seven-year tenancy agreement, which can be extended at the end if you’re not able to buy.
What is peer-to-peer lending?
PEER-to-peer works by matching businesses or individuals that want to lend money with those that want a loan.
The idea is that this form of lending cuts out banks and traditional lenders, thereby offering you higher return rates than regular savings accounts.
Peer-to-peer lending firms such as Zopa, Funding Circle and Ratesetter currently offer up to 6% rates.
But this type of lending is not without risk.
The industry is now regulated by the Financial Conduct Authority (FCA) but it's not covered by the Financial Services Compensation Scheme (FSCS) which protects amounts of up to £85,000.
This means if a peer-to-peer lender goes bust, you could lose your money. Several high-profile companies have collapsed in recent years.
Peer-to-peer firm Lendy, which offered loans on property developments, collapsed into administration in May 2019, with investors at risk of losing a collective £152million.
Funding Secure then went bust in October last year, leaving investors in limbo about £80million worth of loans.
Some peer-to-peer lenders also charge a fee for their service.
For example, StepLadder charges a monthly fee of around 3-5%, which means you’d pay £25 extra on a £750 payment.
Your savings could also earn interest elsewhere at a higher rate – and you wouldn't have to pay a fee.
When the property is resold, after the mortgage is repaid, the investors receive back their money, plus any increase in the equity of the home.
Although, if the home falls in value then all investors – including you – will lose cash. So the scheme is not without its risks.
Tom said: “Being able to take a long-term tenancy was what really sold this scheme to us.
“It gives us a secure place to live with our deposit growing if the house grows in value.”
Tom and Stef plan to buy the house at the end of the tenancy when Stef’s business is well established.
As well as a long-term tenancy, families using the scheme have the flexibility to make any changes inside the property that they want.
But changes to the structure of the house must be approved by Onstep first.
Families can also choose to buy the property after five years, rather than waiting for the tenancy to end.
As you are not the owner, and named on the mortgage, your rent is going towards paying the investors’ interest rather than paying off the debt on the house.
Other drawbacks include paying a higher stamp duty bill than if you were buying the house by yourself, and the risk that your investment could shrink if the property falls in value.
Since moving in, the couple have already made major changes to the house.
“I’ve already insulated the house and added a downstairs toilet and we’re in the middle of refurbishing the bathroom,” said Tom.
“We’ve transformed the concrete back garden into a lawn with flower beds and next on the list is the installation of a biomass boiler and solar panels.”
How to get on the property ladder with Onstep
To be eligible for Onstep’s scheme, tenants credit files and earnings are assessed, but the tests are not as strict as those carried out by a bank.
Tenants are currently restricted to choosing houses in the south and south east of England priced between £175,000 and £600,000. Onstep has plans to expand into areas such as Manchester and Liverpool.
Onstep is regulated by the Financial Conduct Authority and its peer-to-peer platform has been established for five years.
Peer-to-peer is a fairly new way of raising money to fund loans and there have been several high profile cases where firms have collapsed and investors have struggled to get their money back.
If Onstep goes bust tenants are protected by their tenancy agreement and can carry on living in the property.
Once the tenancy expires, the only change is that they cannot choose to extend the tenancy again. The family must either buy the house, or it is sold and they get their original investment back plus additional cash if the house has gone up in value. If the property falls in value, their investment shrinks.
Their investment, and that of the other P2P investors, is not protected by the Financial Services Compensation Scheme which can protect up to £85,000 of savers money if a company fails.
However, Onstep investors are protected by a legal charge on the property, like a mortgage, which means they get their money back when it is sold.
Because Onstep is buying the house on behalf of the tenants the additional 3% stamp duty is charged on top of the standard stamp duty bill.
The stamp duty, along with Onstep’s fee of £2,500 are added to the purchase price and the cost is shared by all investors.
Onstep isn’t the only affordable housing scheme open to home movers rather than first-time buyers.
Proportunity is a similar scheme to the government’s Help to Buy Equity loan scheme and is available in England and Wales.
Affordable homes specialist Rupi Hunjan, managing director of Censeo Financial, said: “Some of these new homebuying schemes are extremely clever but buyers need to consider whether a bank would be happy to offer a mortgage on that scheme.
“Help to Buy, shared ownership and affordable housing schemes from national companies like Heylo or London firm Pocket Living are all supported by the big lenders. Some of the newer affordable housing schemes may not.”
Heylo is a private company that offers shared ownership schemes on new-build and second-hand homes through its Home Reach and Your Home schemes. Pocket Living offers compact affordable homes in London.
First-time buyer George Martell, 30, also purchased a place of his own for £37,000 without even taking out a mortgage – a house boat.
And Mike Hudson spent £5,500 buying and doing up a van to live in after he was sick of paying rent.
Meet the man who sold his family home to build a £1million dream house.
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