How does it work?
Although the jargon can sound confusing, the basic idea behind a rent-to-buy option is straightforward, once you have found the property that you want and agree. Typically, three to seven years at a price agreed when you first moved in. You’re under no obligation to buy at the end of the rental period the option conditions, e.g. price, term, rent etc., you can then move in as a rent-paying tenant. You’ll then have the option to buy the property outright after a fixed period of time.
Do I pay a deposit?
The option provider will usually ask for an initial upfront payment for the option. This can be as low as 3% of the property’s value so it’s much less than most mortgage lenders will require (15% min). This payment is knocked off the agreed price for the property.
What are the benefits of purchasing property this way?
For many first time buyers, rent-to-buy can offer a much better deal than a conventional purchase. Rent-to-buy offers those who would like to buy their own home a step up on the property ladder. Since you’re on the property ladder with the purchase price locked in from the start, rent-to-buy give you time for your financial position to improve so you can afford to buy at the end of the rental period. You don’t need to take out a mortgage straight away on the house but rise sufficiently as a protection to avoid most of the financial loss if prices fall. Rent-to-buy gives you the opportunity to make a capital gain on the prices. While that happens, you get to live in a property you can think of as your own.
Are there any downsides?
Taking out an option is a major commitment – just like buying a property. You’ll be living in the same place for the agreed rental period, which means that you have to think carefully about your future plans before you sign up.
Will the rent be higher than a normal lease?
The rent you pay with an option will be slightly higher than if you were just a tenant. Often part of this additional rent is taken as payment for the option to deposit for the future. If you don’t exercise then the cost of higher rental payments is not refundable. However, this is still better than having bought a property which has fallen substantially in value the option buy along with the amount paid up front. This total option payment is knocked off the agreed purchase price if you buy. In effect, this means that some of the rent helps you to build a mortgage.
Will the rent go up during the rental period?
Do I need a solicitor?
You are advised to consult a solicitor so that he can explain all your obligations to you.
What if my personal situation changes?
It may vary between vendors, but this general rule is applied: If at any time after the first six months you decide that you’re personal circumstances have changed and that you can no longer go ahead, then you may give one month’s notice to leave. You will have lost your option to buy and your initial deposit. You cannot give notice during the first six months.
What happens if I can’t pay the rent?
Again it varies depending on the vendor but it is usually if you fall more than two months behind you will lose your right to exercise the option to purchase and any deposit monies paid. You can continue renting on a standard AST for the agreed rental or the landlord could begin legal proceedings for possession of the property.