Rent to own schemes

In a conventional residential house purchase, a purchaser will typically pay a deposit on exchange of contracts, typically 25% – so for a house being sold for £135,000 the deposit would be £33,750. The mortgage would then be £101,250 to complete the purchase. The purchaser then makes monthly payments for a term (typically 25 years), each of these consist of interest and capital repayment. At the end of the term the mortgage will be paid off in full and the purchaser will own the house outright.

When applying for a mortgage, purchasers will need to have a good credit score with credit reference agencies (CRAs) in order to qualify. They will also need to have a significant sum of money in order to pay the deposit – 25% of the value of the property. Without these two things, purchasing in the traditional way may not be an option. However, there is an alternative – a rent to own agreement. With this contract, buyers agree to rent the property for a set amount of time (typically five years) before then exercising an option to purchase the property when the rental term expires.

The following explains how rent to own works and may be a good choice for someone who wants to buy their own home but isn’t immediately in a position to do so

A rent to own agreement allows a buyer to move into a house straight away, this allows several years for that person to work on improving their credit score as well as saving up towards a deposit. Certain terms and conditions must be met as specified in the agreements.

This is the fee payable by the purchaser, it provides them with the right to purchase the property in the future. It does not place any obligation on them, however. If the purchaser decides not to buy at the end of the agreement, then it simply expires and the purchaser can walk away. Purchasers will need to have a specialist lease option solicitor to act on their behalf in formalising the agreement.

The option fee is usually negotiable and usually ranges from 2.5% to 7% of the purchase price. With some contracts, part of the option money is applied to the purchase price on completion.

The contract will specify the exact price agreed to be paid for the house as agreed in future at the time the rental agreement expires. This will be usually higher than the current market value to allow for house price inflation and any value-add that the tenant buyer does to the house (e.g. refurbishment, new kitchen, bathroom, windows etc.). this allows the tenant buyer to know where to aim in terms of finances and provides several years to save and prepare, during which time they can make improvements to the house and enjoy the immediate benefits of living in an improved and personalised property.

rent will be payable monthly in the same way as any rental property. The term of the rental agreement (sometimes referred to as the lease) may vary but is typically three to five years, it is negotiable. A higher than market rent is payable since part of the rent will go towards a contribution towards the purchase at the end of the term (i.e. be put towards the deposit)

Depending on the terms in the contract, the tenant buyer may be responsible for maintaining the property and paying for any repairs just as if they already owned the property.

The contract should clearly specify maintenance and repair requirements – for example, cleaning out gutters, cutting the grass, removing weeds, which are all very different from, say, repairing or replacing a damaged or age expired roof.

If the tenant buyer decides not to purchase the property for any reason at the end of the term, then the option expires. The tenant buyer forfeits any money paid up until that point, including the option fee and any rent credit earned.

If the buyer decided to exercise their option to purchase then they will typically apply for a mortgage and purchases the property from the seller at the previously agreed price. The contract may specify a reduction in the purchase price through deducting a part of the option fee and rent as previously agreed in the contract. The purchase of the house completes in the normal way and the tenant buyer becomes a homeowner.

Rent to own is a great scheme for people who want to own their own home but aren’t immediately in a position to do so financially. It allows them to live in their property as if it were their own, effectively locking in the house they want to own on day one. If they have a bad credit score, it provides time to work on improving this. It also provides time to save towards a deposit. During the period of the contract their employment circumstances may improve, for example promotion, salary increases etc. which will of course help in obtaining mortgage finance when the time comes.

For rent to own to work, tenant buyers need to be confident that they’ll be in a position to make the purchase when the time comes at the expiration of the lease term. Otherwise, the option money paid up front and higher rent will have been for nothing.

Rent to own contracts allow aspiring buyers to move into a house quickly. It allows them to experience living in a house as if they owned it, being responsible for repairs, maintenance and even any improvements that they might like to make in order to make it a truly personalised home. It is very important that people fully understand what they are committing to when signing a rent to own contract.