Traditionally, prospect home buyers obtain a mortgage loan via a bank to purchase their dream house. However, this is often not possible due to reasons such as bad credit, insufficient savings, employment instability and insufficient income. In such a situation, you need to consider all possible alternatives. One of them is a rent-to-buy property deal. Find out how this option works to decide whether it will be suitable for you.
The rent-to-buy property agreement gives you the opportunity to rent a house with the option for purchasing it. You will pay a rental rate just like for a regular rental property. At the end of the rental period, you will have the option of purchasing the property. The purchase price is set initially by the seller and the buyer and cannot be changed. Typically, there is a deposit, which is paid initially and which goes towards the purchase price. In most cases, a chunk of the monthly payments goes towards it as well.
The term of the agreement is chosen by the buyer and the seller. It can be from one to five years, but in most cases it is between three and five years. Just like all other features of the deal, the term is subject to negotiation. After the term expires, the buyer has the right and the obligation to purchase the property.
Deposit and Rental Rate
Upon the signing of the rent-to-buy agreement, the prospect buyer places a deposit. This deposit can be a fixed sum determined by the seller or calculated as a percentage of the value of the property. In any case, it is typically around five times smaller compared to the deposit which you have to place when purchasing a house with the use of a mortgage loan. This deposit is discounted from the sales price at the time of purchase of the property.
The rental rate, which can be paid monthly or fortnightly, consists of two parts – the rent and the chunk which goes towards the sales price. The latter chunk is smaller, but it is very important. It helps you to built equity in the property so that when the time for purchase comes, you can place a smaller deposit or no deposit at all.
If all goes well, when the time for purchase comes, you will be able to take out a home loan to finance it. If the property’s value has increased, this will work in your favour as you will have to pay a fixed price. If you have difficulties with paying the rental rate, you can readily renegotiate it with the seller. If you decide to move or you cannot afford to keep the property, you will be free to leave.