What is Rent to Buy?
Could a Rent to Buy scheme help you get into your own home?
The question of ‘Is it better to rent or buy?’ is a common one but what if there was a way to do both? While they offer a different way to get into the property market, rent to buy or rent to own schemes won’t be for everyone.
Rent to buy is a type of vendor (or seller) finance, where the owner of a property provides finance to the buyer. Sound a bit backward? Some experts think it is and warn against it. However, if the vendor is willing it becomes another way for young home buyers to enter the housing market without having to buy something up front or go through traditional lenders for finance.
What is rent to buy?
Just as they sound, rent to buy schemes are like renting a property, but you may pay a bit more in rent with the additional amount going towards potential home ownership at a future agreed date.
The property needs to have a renting or leasing contract, which outlines the market rent and basically allows you to live in the property. This will also likely include an agreed time frame of how long you want to rent the property for.
Help building a deposit
Then there’s the buy or sale component, called an option deed or option, which allows the tenant to buy the home and move into a mortgage agreement at the end of the lease term. Often an upfront option fee will need to be paid, plus additional ongoing option fees which are on top of the agreed rental payments.
These fees help the buyer build up a deposit, so at the end of the rental period, they have a smaller balance to pay on the agreed property value if the purchase goes ahead, which could be helpful for young home buyers. However, if it doesn’t, the vendor will keep the fees. The normal rental payments don’t go towards the sale as they’re covering the landlord or owners.
Improve your track record
Typically, the price of the property is agreed up front so any increases in value will be to the buyer’s benefit in capital gains, which is meant to offset the option fees being non-refundable.
Combining the rent and option fees shouldn’t cost you more than a typical mortgage would if you had bought the property initially. Depending on your credit history, employment, assets and other liabilities, these regular payments might also help you build up a good track record of payments to help you qualify for a loan from a traditional leader when buying a house at a young age.
Potential pitfalls
Before entering into this type of scheme it’s important to seek professional financial and legal advice because there can be some risks or downsides to rent to buy, including:
* The property purchase price can be more expensive than market value, making it difficult to build up equity or qualify for finance;
* The intermediary involved may take a large percentage of the rental payments, option fees, and even final sale;
* The buyer’s name isn’t on the property’s title so there are less security and no way to protect their investment, e.g. if the seller goes bankrupt others can make claims against the property; and Financing isn’t guaranteed, so if the buyer defaults or can’t secure finance when it comes time to buy, they may lose all the money they have already invested into the property.