Could lease options on property be an affordable route for struggling first-time buyers?

Many people see lease options as a great way to get a mortgage for those who don’t qualify for more traditional types. However, they do have some substantial drawbacks which should be fully understood before taking one.

How does it work?

These are a type of rent to own option for residential properties. It requires one party who wishes to sell a property, but is having trouble finding buyers able to come up with a mortgage deposit. They allow a tenant to move in and take over the payments on the property’s existing mortgage. The term ‘lease option’ refers to the tenant’s ability, at their option, to buy the property at a predetermined price at the end of or during a certain time, as agreed between the two parties. An ‘option fee’ is paid at the beginning of the agreement instead of a traditional deposit, and this fee can sometimes be as little as £1, instead of the 5-10% most mortgages require.

There is usually a middle man of some kind who takes a cut of the option fee, rent and final purchase price, if a purchase does occur.

Why are lease options desirable?

Many people who do not qualify for or cannot afford a mortgage can get a lease option deal, allowing them to get on the property ladder without coming up with a substantial deposit. Buyers may also prefer lease options to rental agreements which can never end in ownership. As the purchase price is pre-agreed, they can make improvements or additions, without the benefit (necessarily) going to their landlord instead of themselves.

What could go wrong?

You should be aware that lease option deals are still new, and are completely unregulated. The purchaser can easily end up losing their home, yet still be liable for the mortgage payments (read more about the dangers here). Both the FCA and the Council of Mortgage Lenders advise against entering into a lease option deal.

Investors and middle men can arrange these deals to the great disadvantage of inexperienced or vulnerable buyers and sellers alike, who then have little or no recourse in court.

The biggest risk is to the seller. The mortgage is still in their name, and if the renter (or the middle man) stops paying, the original homeowner must pay the mortgage, in addition to their current living costs. This can, and already has, led to repossession and substantial unexpected debt for several homeowners who thought they had effectively ‘sold’ their homes.

Do lease option deals have a future?

Perhaps, but it will most likely be a more regulated one. The FCA is observing the deals (and their fall-out) carefully, and would prefer to see more protective measures and regulations in place. That can be expected to drive up costs, and perhaps to exclude some of the more vulnerable homeowners and prospective buyers, all too often the ones keenest to make these kinds of deals. 

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