Rent to buy Ireland 2020: scheme or scam?
So you’re considering purchasing a property but have no idea how you are going to come up with the large sum of cash required for a deposit. Rent to buy could be the answer, but is it actually worth your while? Read on and find out.
What does rent to buy mean?
Rent to buy, also known as rent to own, similar to a lease option agreement, 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 rentee 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.
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.
At the end of the agreed rental period, the prospective purchaser can decide whether they wish to purchase the property or to abandon the transaction.
Some or all of the rental payments can also be included as monies received towards the cost of purchasing the property.
What are the advantages of rent to buy?
- Rent to buy allows you to “try before you buy”. This enables you to dispel any doubts you have about whether a certain property or location is for you.
- You may have to pay a small deposit of up to €5000 or 2% of the property market value, however, this 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”. Renting to buy allows you to allocate at least part of your rent towards building credit and purchasing your future home.
- A recent article by the Irish times revealed that renters in Dublin now pay up to 40% more each month than buyers. As such, rent to buy could be a way to pave the path to a more affordable housing solution by leading to prospective purchasers exiting the accommodation rental market.
- For developers or sellers, the advantages are multiple 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.
- Rent to buy schemes 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.
What are the disadvantages of rent to buy?
- 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 you had paid.
- You normally pay a higher rent than the usual market value, and this can be hard to budget for.
- Not all of the money you pay towards 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 (including paying a deposit and possibly a higher amount of rent) will have been for nought.
- By agreeing 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.
- 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, which has VAT implications for both the prospective purchaser and the vendor.
- The lease to allow 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 as 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 to find a rent-to-buy property
While rent to buy agreements can be proposed and entered in to by anyone in the open market, there are also some schemes organised by agencies.
Roche Group - 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 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.
Quartech deal with finance and property portfolios. They require a 5% deposit for their Right-to-buy scheme. Unlike other schemes, Quartech will purchase the property of your choice for you under the rent to buy agreement. To find out more information, you can send an email to email@example.com.
You will also need to send information regarding:
- The cash you currently have access to, to use as a deposit.
- Your monthly income (rent payments should not exceed more than 40% of available income).
Verdict: rent to buy, scheme or scam?
While there are benefits to renting to buy in certain cases, such as 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 for comparable properties, 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.