Rent-to-buy contracts

Jon Green, Chief Executive of The Lease Option Company, offers his advice on 'rent-to-buy' contracts

  • What’s the difference between ‘rent-to-buy’ and ‘lease options’?

    ‘A ‘lease option’ is the technical definition for a specialised tenancy agreement allowing the tenant to rent a property for a length of time with the option to buy it outright at the end of the rental period. Lease options are sometimes called ‘rent-to-buy’ schemes for this reason.’

    How does it work?

    ‘Although the jargon can sound confusing, the basic idea behind a lease option is straightforward: the lease option provider will acquire your home for you, either by buying on your behalf or working with other landlords, and allow you to move in as a rent-paying tenant. You’ll then have the option to buy the property outright after a fixed period of time, typically three to five years, at a price agreed when you first moved in. You’re under no obligation to buy at the end of the rental period.’

    Do I pay a deposit?

    ‘The lease option provider will usually ask for an initial upfront payment for the option. This can be as low as two per cent of the property’s value so it’s much less than most mortgage lenders will require. 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, lease options can offer a much better deal than a conventional purchase. You don’t need to take out a mortgage straight away, giving you time for your financial position to improve so you can afford to buy at the end of the rental period. While that happens, you get to live in a property you can think of as your own home. And you’re on the property ladder with the purchase price locked in from the start, giving you the opportunity to make a capital gain if prices rise sufficiently as well as the protection to avoid most of the financial loss if prices fall.’

    Are there any downsides?

    ‘Taking out a lease 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 a lease option will be slightly higher than if you were just a tenant. Part of this additional rent is taken as payment for the option to buy along with the amount paid upfront. 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 deposit for the future. If you don’t exercise the option 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.’

    Is this scheme widely available?

    There are only a small number of lease option providers in the UK at the moment. If you’re based in the London area, contact The Lease Option Company (020 8947 8377/’

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