What are rent-to-buy schemes?
They essentially allow you to try before you buy.
They are similar to a lease option agreement in the commercial market. This gives you the option to buy the house you are already living in on an agreed date which can be any time up to three years. Rent is really dead money and these schemes allow you to put some of that money towards saving up a deposit for your future house. The developer agrees to sell to you at a fixed price in the future and is locked in to the agreement.
You have the option to say yes or no.
Is there a catch?
You generally pay a deposit - generally between €3000 and €5000 or maybe 2% of the purchase price. Typically, this is not refundable. You generally pay over and above market rents and not all of the money you pay goes towards your eventual deposit.
How does it work?
You build up credit in the home which in theory should allow you to prove to your bank that you are capable of saving. In the current credit crunch it is difficult to get a 100% mortgage, but if you can show you have paid X amount of value into your home then you might stand a better chance of being given more money.
The developer takes the credit you have saved up off the purchase price of the house.
How many of these schemes operating in Ireland and where?
There are only three or four here so far.
The scheme is currently on offer in county Cork through Ascon Gable and Glen Beg developments who both say it has been successful in stimulating demand there.
In Australia such schemes were very controversial. Some there and in New Zealand have worked successfully but in other cases, families ended up locked out of homes that they could never afford to buy. Many had poor credit ratings in the first place and were not good potential house buyers. Sean Power says the way round this is to get his potential buyers to get credit checks and make sure they are in a position to close.
Others say that these schemes are offering a choice to future buyers who might be struggling to save up the kind of deposit that would now be necessary for say a 92% mortgage.
What future do these schemes have?
It depends what happens to the market. You are taking a gamble on whether house prices go up or down. The developer in West of Ireland who tried these early on says they only work in markets where house prices are rising or holding steady.
In worst case scenario, you could still be rejected by the bank and have made a lot of changes to the home, or become so attached to it you are not in a strong negotiating position. You could also find out that you could have bought the house for cheaper on the open market.
Putting money into credit union or a high interest account could be an equally valid way of saving while you rent as you will have more choice and flexibility in terms of the house you buy.