- Understand the difference between Rent-to-own and buying or renting the property
- Understand who the tenant-buyer is
Rent-to-own is a unique way to purchase property. It is a combined renting with a purchase.
The process is relatively simple. You pay a small deposit today, and you are renting the property for an agreed period. Afterwards, you simply purchase the property with the help of a mortgage for the fixed price from the outset.The deposit you are paying is far less than a standard deposit required by banks and is usually 5-7% of the property purchase price. However, it can go up subject to your circumstances and landlord requirements. However, the higher deposit will automatically mean a lower rent, so you might be just better off paying more deposit.The monthly rent you are paying is standard market rent for similar properties in the area, plus on top, you are paying around 20% of your monthly rent, which goes towards your deposit for a purchase. For example, your monthly payment is £1200, and £1000 from it is the rent, and £200 is your capital repayment going towards a deposit for the purchase. However, you are free to make any overpayment that will go towards your deposit. The landlord potentially can look at the lower monthly payments if the deposit is high enough, so there is a way to save even more!
The term can differ from one property to the other but usually is between 2-5 years. It is the time during which you are paying your rent together with capital towards the deposit. You are likely to make sure your credit history is getting better through that time, as you should prepare yourself towards obtaining a mortgage once the term is over. The purchase itself is a standard UK Conveyancing process. You will also likely apply for a mortgage which should be at least six months before the end of term. We are working closely with experienced regulated mortgage advisors dealing with Rent-to-own cases daily who guide you through the whole process of mortgage application until purchase completion. Your purchase price is agreed upon at the beginning of the Rent-to-own agreement. Your deposit for the entire purchase is the amount you paid at the very beginning, plus your monthly capital payments together with any extra overpayment you have done throughout the agreement.
Once you sign a Rent-to-own agreement and move to the property, then you are a tenant-buyer. Typical Rent-to-own scenarios:
- Property purchase price: £600000
- Deposit upfront: £50000
- Monthly payment: £2400 including £400
capital repayment term 3 years
- Extra deposit saved over three years: £400 x 36= £14400
- Total deposit at the time of purchase: £64400
- Mortgage required: £600000 - £64400 = £535600
- Property purchase price: £200000
- Deposit upfront: £15000
- Monthly payment: £1200 including £200
capital repayment term 3 years
- Extra deposit saved over three years: £200 x 36 = 7200
- Total deposit at the time of purchase: £22200
- Mortgage required: £200000 - £22200 = £177800
Rent-to-own is a unique way to combine renting and owning To own the property in Rent-to-own you first pay the deposit, then monthly rent with capital uplift, and you are getting the mortgage at the end of the term, and then you fully own the property. Between singing the agreement and completion, the person staying at the property is called tenant-buyer.