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What is rental purchase?

This content applies to England & Wales

How rental purchase schemes work, and the rental purchase agreement.

Rental purchase is a form of tenure found mainly in the north west of England. Properties are typically 'two up two down' Victorian terraced houses with low values. Companies sell leasehold and freehold properties on rental purchase to people who do not fulfil ordinary mortgage criteria because of low income, unemployment, disability, lack of savings, deposit or references.

Rental purchase can appear very attractive, because it has few credit restrictions or checks on credit worthiness, no legal fees to pay, and is a simple transaction between buyer and seller. However, there are many problems with rental purchase schemes that rental purchasers should be made aware of, particularly that rental purchasers have neither the security of owner-occupiers nor the rights of tenants. For more information, see the section below on Security of tenure.

The rental purchase agreement

Buying a home on rental purchase simply means buying it on hire purchase. Unlike a conventional home ownership arrangement, a rental purchase agreement is a contract to buy by instalments. The purchaser is allowed the use of the property while they pay for it, but will not own it until after the final instalment has been paid. The purchasers are therefore allowed to reside in the property, not as a tenant or owner but as a licensee.

The property is normally bought over a period of 10 or 12 years, and the rate of interest payable is often much higher than on a conventional mortgage – 25 per cent and higher is quite common. Agreements will usually be in writing, but the terms can vary widely. The agreement will provide for a specified sum to be paid before completion can take place. It will usually also specify the interest rate to be charged on the outstanding capital. A fixed weekly or monthly sum is specified that will either go directly towards repaying the capital borrowed, or will go towards paying for the accrued interest, buildings insurance, and other outgoings, with only part going towards repayment of the capital. Some agreements provide for completion to take place before payment of the whole capital sum, but with the vendor granting a mortgage at the date of completion of the sale for the sum outstanding at the time.

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