What is Rent to Buy and How Does it Work?

Apart from the straightforward investment in a new property, are there any other ways for you to become a homeowner? Rent to buy schemes have been a popular option for first-time buyers and there are a lot of reasons why.

In this article, we’ll look at rent to own in more detail and provide valuable information that we hope you’ll find useful in making the decision of whether this option is the right one for you.

Rent to buy homes: What are they?

If you’ve decided to become a first-time homeowner but your financial situation is still a bit unstable and uncertain, there may be an easier option for you to get your dream home. This option is called rent to buy but can also be seen as rent to own, try before you buy, and intermediate market rent. These terminologies all mean the same thing and we’re about to turn the lights on by providing all the information you need to fully understand them.

What is rent to buy?

Rent to buy is agreeing to commit to leasing out a property for a particular time period and keep the option of buying it before the tenancy agreement is over. The scheme has been designed to help first-time property buyers who are having difficulty buying a home as a result of poor a poor credit score or shortage of cash for a down payment.

Rent to buy properties can be found on government websites or via speaking to specialised agents who can help you find a suitable property based on your location preferences, size, and other factors.

How does rent to buy work?

Now that you’re familiar with the basic definition of rent to buy, it’s time to move on to the most interesting parts - exploring the opportunity in more detail.

Rent to buy schemes

Rent to buy schemes set out the essential terms and conditions of a rent to own agreement and clarify a lot of questions both the seller and the buyer could have. Let’s see what the information has to offer.

What is a rent to buy scheme?

Rent to buy is a government scheme, which allows potential buyers to benefit from subsidised rent on a property they’ve selected and that qualifies for the scheme. After the renting contract is terminated, the tenant can decide between purchasing the property or agreeing to a shared ownership deal.

How does rent to buy work in the UK?

In the UK, most rent to buy agreements are for a fixed period of three years but can last for five or more, after which the tenant must confirm what their intentions are.

So what are the average fees paid for rent to own? When submitting your application to qualify, a fee of £100 is required. Once you have qualified and you have chosen the property, you will be asked to pay a deposit which is the amount of a month’s rent in addition to a down payment of £2,500. While renting the property, you will be obliged to pay the market rent.

Once your tenancy agreement is over and you have confirmed your decision to buy, you will receive your down payment, a holding fee of £20 and be paid back 20% of your rent. The reason for doing this is to help you use this money as a deposit for a rent to buy mortgage.

Sellers and rent to buy

How does rent to own benefit sellers?

Rent to own schemes are not only advantageous for buyers. Sellers of such properties also have a lot to gain. For instance, the seller is guaranteed a steady revenue flow that they can rely on regardless of the situation on the market. Tenants have a strong motive to make payments on time and the communication is usually easier and more straightforward.

Additionally, the majority of rent to buy transactions are independent, meaning that there are no transactions fees paid by the seller. Furthermore, the seller’s mortgage is covered regardless of whether they need to relocate or find another home. They don’t risk having a vacant rented property and no money in the bank.

Can a seller back out of a rent to own agreement?

Rent to own agreements cannot be backed out of either by the seller or the buyer. A seller risks losing their authority to sell the house if they attempt to terminate a buy to own agreement or does not abide by its terms. There may be other additional consequences such as being sued or held responsible for financial damages.

Buyers and rent to buy

In order to be eligible for the scheme, you must be able to show proof of your ability to make regular payments and evidence that you are not able to buy a home via another path. Buyers often ask whether they can get a rent to own home with bad credit. The short answer is no. The scheme does not entirely omit the requirement for you to show a good credit score in order to purchase the home in the future. Other common questions include:

What credit score do you need for rent to own? - Depending on your area of residence, the credit score needed may vary. It is best to speak to a professional regarding the credit score requirements on rent to buy properties.

Do I need a down payment for rent to own? - Yes, you will be asked to pay a down payment at the start of the tenancy agreement, which will be returned to you once the agreement ends.

Is rent to buy a good idea?

So is this type of agreement something that you should consider? Is there anything else that you should know before deciding if it's the right option for you? Surely, a quick advantage vs. disadvantage layout could help!

The pros and cons of rent to own

There are a number of reasons why a first-time buyer may prefer rent to buy schemes. Some of the top advantages for buyers include:

  • Gives you enough time to sort out your eligibility
  • Provides more security and a stress-free tenancy as you won’t be questioning when your landlord will decide to sell
  • You can select a property that answers your location preferences
  • Getting the mortgage for the property purchase will be easier as it will be partially stored from your monthly rent

Of course, there are two sides to the coin. A few drawbacks of rent to own schemes should be considered:

  • In most cases, the monthly rent is more expensive for tenants who have entered a rent to own scheme.
  • There is no guarantee that you will actually purchase the property after the tenancy agreement, meaning that there is some financial risk involved.
  • By signing a rent to buy agreement you are also creating a long-term bond with the landlord that you may not want to abide by in the future.

Is rent to own better than buying?

It is difficult to answer the question of whether rent to buy is a better choice when compared to buying upfront. Of course, if there is no other option for you to become a homeowner it is always better to consider this scheme as an alternative. It is advisable to get as much information as possible before making the decision to avoid unexpected situations and legal consequences.

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