Rent to buy is an attractive alternative for those people who do not have access to the financing they need to buy a house. This option allows you to live in a home while paying rent and later decide whether to buy it. To do this, you can choose to take out a mortgage or do without it, depending on your circumstances. Read on, and we will tell you everything you need to know.
What is rent to buy?
Rent to buy is a type of contract that allows you to rent a house to buy it at a later date. Its main advantage is that whatever you have paid in rent is deducted from the final purchase price.
In this way, you can buy a home without needing to take a mortgage out for the full purchase price.
How does rent to buy work?
Renting with the option to buy involves signing a contract which, in reality, consists of two contracts:
- A rental contract: governed by the Urban Leases Act (LAU).
- A purchase contract: governed by the Civil Code.
Both contracts set out the conditions and how the rent-to-buy will proceed. The rental contract stipulates how much rent is during the first years (when the tenant lives in the house, which is a maximum of five years). While the purchase contract stipulates the price of the property and guarantees that the tenant can access the purchase of the property if he/she wishes to do so after the estimated number of years.
This type of contract usually includes a monthly rental price (just like any other rental contract). In addition, they also establish the tenant's right to buy, who usually pays a premium when signing the contract.
The premium is a part of the house price paid at the beginning of the rent-to-buy contract. It is usually 10% of the property price (although this percentage can vary). The premium acts as a deposit and guarantees the seller that the signee is serious about buying at a later date.
How much is discounted when renting to buy?
If the renter decides to buy the house he/she has rented with an option to buy, the amount that has yet to be paid must be calculated. This is done by subtracting both the premium and the rent paid over time from the full price. The renter will have to pay the resulting price to buy the property.
Do I need a mortgage for rent to buy?
This depends on how much needs to be paid. When you rent to buy, you may considerably reduce the amount you need to pay when you eventually purchase the property. As such, you can buy this type of property without a mortgage.
However, you can take out a mortgage to buy a rent-to-own house. Banks usually grant rent-to-buy mortgages without too many problems since they consider it very safe to lend money to buy a property that, for the most part, has already been paid for.
What are the benefits of rent to buy?
Some of the main advantages of rent to buy are:
- You can buy a house without savings. This is very useful, for example, for young, first-time buyers.
- By taking out a mortgage for only part of the total price, you end up paying less interest. Why? Because interest is calculated on the money borrowed, not the house price. So, if the bank only lends you 40%-50% of the house price, you only have to pay a very low interest rate.
- It allows tenants and future owners to see what it is like to live in the house before they buy it. That allows them to assess whether it really is the house they want or whether, on the contrary, it does not entirely meet their needs.
On the other hand, the main disadvantage of renting to buy is the premium paid at the beginning of the contract. If the renters decide against buying the house, they lose the premium.
How many years can I rent to buy?
The Spanish Urban Lease Law stipulates that the maximum time that a person can be in a rent to buy is five years. However, there is no problem if the person wants to buy the property before these five years are up.
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