Rent to buy Ireland 2023: Scheme or Scam?
Rent to Buy schemes are ways for people to pay for the deposit on their house in their rent payments. This makes it much easier to build up your deposit over time rather than have it in one big go. Read our comprehensive Rent to Buy Scheme guide to find out everything you need to know!
What Is Rent to Buy?
Rent to buy in Ireland, also known as rent to own, is similar to a lease option agreement. It is the name given to a legal agreement included or in place of a traditional rental contract where after an initial period of renting, the renter has the option to purchase the property.
What is a lease option agreement?A lease option agreement is similar to a rent to buy scheme however the date upon which you choose whether to buy the house or not is within three years or less of signing the initial lease option contract. This is different from a normal lease agreement with standard landlord-tenant arrangement.
How Does the Rent to Buy Scheme Work?
The process for the rent to buy programme is relatively straightforward, there are only the following three steps for the scheme:
- Upfront Payment
In Ireland, there is sometimes an upfront payment, of a lesser amount than the traditional deposit required to purchase a house. This amount normally runs to around €3000 - €5000, or 2% of the proposed purchase price. This amount is generally not refundable should you decide not to purchase the property.
The potential buyer will be renting the property for a defined period at the time of placing a deposit. This is usually a period of five years but it can be longer.
- Final Purchase
At the end of the predetermined rental period, the home buyer can decide to purchase the property at the agreed price or to abandon the transaction.
What is the final purchase price? Should the buyer exercise their right to purchase the property, the final price is usually the net of the upfront payment with some or all of the monthly rental payments made.
What Are the Advantages of Rent to Buy?
There are multiple advantages to the rent to buy scheme for both the buyer and the seller, these are:
- Rent to buy in Ireland allows you to “try before you buy”. This enables you to dispel any doubts you have about whether a certain property or location is right for you.
- You only have to pay a small deposit of up to €5000 or 2% of the property market value, which is much less than the minimum 10% deposit required for most mortgages.
- Renting to buy allows you to slowly build up to buying a house when you may not be in a current position to do so, but predict being able to in some years' time (for example, if you think you may receive a promotion and a corresponding pay rise).
- You are not locked into purchasing the property you are renting to buy.
- Renting can be considered “throwing money away”. The rent to buy scheme allows you to allocate at least part of your rent towards building credit and purchasing your future home.
- The rent to buy scheme can offer a quick entry into the housing market in a location which is predicted to become popular - and thus have scarce amounts of high-priced housing in the years to come.
- If you have an unfavourable credit history, rent to buy can improve your financial standing and your chances of getting a mortgage by providing a paper trail attesting to the fact that you were able to pay a certain amount consistently over a set period of time.
- Many renters shy away from making improvements to properties they rent, as in the end, the benefit goes into the pocket of the owner. With the rent to buy scheme, if you plan to purchase the property you will reap the benefit of any improvements made.
- For developers or sellers, the advantages are multiple as well in that the property is occupied by a potential buyer who has a vested interest in maintaining the property in good condition, and a steady income is received via rent paid that can be reinvested in another property.
What Are the Disadvantages of Rent to Buy?
Of course, there are also some drawbacks to the programme which need to be considered as well, they are as follows:
- If you decide not to purchase the property that you signed the rent to buy agreement for, in the majority of scenarios you will lose any deposit made.
- You normally pay a higher rent than the usual market value, and this can be hard to budget for.
- Only a portion of the money paid for your rent is allocated as credit towards your possible future purchase.
- If on the agreed date, you are unable to obtain financing for a mortgage from a bank or other financial institution, all of your efforts will have been for nought. This includes paying a deposit and possibly a higher amount of rent for a few years.
- By agreeing on the purchase price of a house in advance, you will lose the ability to later negotiate on it should the market soften or house prices decrease. You are taking a gamble on the fact that the house price would not go down on the open market. For this reason, it is best to only sign a rent to buy contract when house prices are either holding steady or on the rise.
- Due to the rise in inflation and the rise in interest rates from the European Central Bank (ECB), variable mortgages are going to get more expensive and it's likely that the situation where for renters in Dublin it was cheaper to own your own house will be reversed!
- It can be argued that by placing the amount of money you would need to put towards the deposit and the higher rent into a high-interest account or credit union, you would be better off as you will also receive interest on money that would otherwise go towards the developer or seller.
What Are the Tax Considerations of the Rent to Buy Scheme?
There are usually two parts to keep in mind when it comes to VAT and the rent to buy scheme.
- The option to purchase the property at an agreed price has VAT implications for both the prospective purchaser and the vendor.
- The lease allows the prospective purchaser to occupy the house for a set amount of time, which has VAT implications for the current property owner.
Any payments which are made upfront to count towards the possible eventual purchase of the property are not considered traditional house purchase deposits for VAT purposes and are instead subjected to a reduced rate of VAT.
If the prospective purchaser decides to purchase the house, any amounts they have already advanced towards the purchase, such as deposits or rent payments, will not be considered taxable. Note that while it is fine to discount amounts from the final sale price for rent paid, it is only allowable for part of the rent paid, not the whole.
What is the current reduced rate of VAT?Since January 2017 the reduced rate of VAT has been set at 13.5%, in comparison with the regular rate of 23%.
For the second scenario, as the time period the prospective purchaser occupies the property counts as a residential letting, it is VAT exempt for the purchaser. The landlord will also not face VAT repercussions during the exempt letting period.
However, the landlord may need to make a Capital Goods Scheme adjustment in cases where they have claimed a VAT deduction on the property, for example, to make improvements, updates or repairs.
Where Can I Find a Rent to Buy Property?
While rent to buy agreements can be proposed and entered by anyone in the open market, there are also some agencies which organise the scheme.
What Is the Roche Group for Rent to Buy?
The Roche property development group operates a rent to buy scheme. Prospective buyers can simply:
- Choose a property from any of the Roche developments.
- Sign an agreement to pay a small deposit and a certain amount of rent for a specified period with an option to finally purchase the property at the agreed price.
- On the agreed date, decide whether to proceed with the property purchase or not. If buyers agree to purchase the property, the deposit and a pre-agreed portion of the rent paid will be deducted from the house price.
To find out more about the Roche rent to buy scheme you can contact the Roche Group sales office on 061 40 61 45.
What Is the Housing for All Initiative?
The government has launched the 'Housing for All' plan. This initiative is intended to improve Ireland’s housing system and provide different types of new-build homes for people's different needs.
The rent to buy scheme is available within this initiative, however, the management of these homes is being handled by the different local authorities across Ireland. You will need to contact the appropriate government office to find out when the construction of affordable homes in your area may be ready, determine which are eligible for the scheme, and so forth.
Visit the Housing for All webpage for further details on how to apply, contact information, and for listings of new affordable homes in your area.
The new housing plan for Ireland' is a multi-annual, multi-billion euro initiative set to last until 2030. You may also want to look into other help to buy incentives available in Ireland.
How Can I Apply for Rent to Buy Scheme?
Contrary to other Government schemes, there is no application to be completed prior to opting into the rent to buy option. Agreements are signed between the potential buyer and seller, however, should the tenant opt to buy the property at the end of the rental period, both parties will need to complete various forms in relation to the VAT.
Verdict: Rent to Buy, Scheme or Scam?
While there are benefits to renting to buy in certain cases, such as during a housing crisis or when property prices are on the rise, you will need to carefully analyse the housing and rental market situation before committing.
If house prices are on the decline or if the monthly rent is higher than current market conditions and the amount set aside for your future purchase is not more than the difference, then you would probably be better off simply setting that money and the deposit aside to collect interest for you. You can then choose a property at your leisure at a future date and be better able to bargain.
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