Lease Options - An Affordable Option for First-time Buyers

High property prices, low salaries and widespread debt make that first rung of the property ladder a distant dream for many in the UK. But a new form of property agreement called a lease option could be a light at the end of the tunnel for cash-strapped first-time buyers.

Lease options

The concept of the option is well-known in the financial world, and can be applied to shares, land or property. Having an option gives the holder the right to buy or sell something at an agreed price after an agreed period. The holder usually pays a premium to be granted this right, but is not obliged to exercise it.

So how does it work? A lease option agreement involves a tenant being given the option to buy a property at an agreed price at the end of a given rental period, usually three to six years. The renter-buyer pays a consideration up front, but at 2-3% of the market value of the property this is preferable to putting up a full deposit of 5-20% straight away.

Case studies

Take first-time buyers Fran and Fred as an example. They are looking to rent a flat worth £180,000 in January 2007. Under a lease option agreement the owner offers them the right to buy the flat for £200,000 in January 2010, for a consideration of £3,600.

If they agree to the lease option, Fran and Fred can sleep easy while other property prices move further and further out of their grasp. They get to test out their property by living in it before they decide to buy, and if soaring prices bring the value of their flat up to £230,000 by January 2010 then they've clearly got themselves a good deal.

Agreeing a price in advance makes it easier for buyers to plan financially and save for a full deposit. A longer lease and the prospect of ownership provide security and reduce the amount of 'dead' rent money going down the drain. Of course, if you're the itchy-footed type, with frequently changing circumstances, then being tied into a long lease may not appeal.

Another bonus for the renter-buyer is avoiding the nasty business of buying property on the open market. A deal agreed in advance, on a property you're already occupying means no complicated chains or moving costs.

Lease options don't just have to be for first-time-buyers. They can provide a place to live at a guaranteed price and time to sell your existing property. This is useful if your property is slow to sell but you need to relocate quickly.

A lease option is not completely risk free though. It only saves buyers money while prices are rising. If the value of Fran and Fred's flat ends up declining over those three years, they're left with a difficult choice: Pay over-the-odds for the property, or forfeit the option to buy and start again from scratch.

http://www.ourproperty.co.uk/guides/lease_options_an_affordable_option_for_firsttime_buyers.html

First time buyers forced to rent by lack of mortgage products, research shows

The number of people renting property in the UK has risen by 5% since last October mainly because first time buyers can't get mortgages.

Research by price comparison website, Moneysupermarket.com, found that the surge in demand has been led by potential first-time buyers forced to delay their plans for property ownership by mortgage companies tightening their lendingcriteria and, most notably, raising deposit requirements in return for their best interest rates.

Eleven per cent of those questioned in Moneysupermarket's survey said they could no longer afford a mortgage or had been foiled by new high deposit requirements.

While the statistics should be encouraging to existing and potential landlords, this group of property investors is also afflicted by the demise of the UK mortgage market.

The mortgage industry estimates that between 40 and 50 % of buy-to-let mortgage products have disappeared in the past month.

Louise Cuming, head of mortgages at Moneysupermarket.com, said that they have found that in the past 12 months the number of buy-to-let products has decreased from 4,025 to 674, with almost 600 loans removed since the end of March.

Ms Cuming warned that people are being forced into the buy-to-let market at a time when buy-to-let mortgages are becoming scarce, and that this could lead to a crisis in the UK housing sector.
http://www.propertywire.com/news/europe/first-time-buyers-forced-to-rent-by-lack-of-mortgage-products-20080509935.html

Home ownership falls for first time in nearly 100 years

Home ownership has fallen for the first time since 1918 after soaring property prices and stagnant wages left many more people stuck in rented accommodation, official figures show.

The proportion of people in England and Wales who own their own home rose dramatically from just under a quarter at the end of the First World War to more than two-thirds in 2001, a study by the Office for National Statistics found.

However, the figure dipped in the past decade as the number of households renting their property shot up by a quarter to reach 8.3 million.

In a sign of the impact of both Baroness Thatcher’s “right to buy” policy for council tenants and the popularity of buy-to-let, by 2011 the percentage of people renting from a private landlord equalled those in social housing for the first time since the 1960s.

The ONS survey paints a picture of changing social patterns over the past century as the dream of home ownership became a reality for many millions before slipping away in the face of unaffordable prices and strict mortgage lending criteria.

In 1918 just 23 per cent of households owned their home. This figure began to rise quickly from 1953 and by 1971 equal numbers owned and rented the property they lived in.

The introduction of the right to buy in 1980 saw a fall in social housing tenants, while the proportion of people in private rented accommodation fell steadily from 76 per cent in 1918 to a low of 9 per cent in 1991 before climbing after that.

Between 2001 and 2011 the percentage of those who own their home dipped from 69 per cent to 64 per cent, the first fall recorded in nearly 100 years.

Over this period there was an 826,000 increase in the number of people who owned their property outright, apparently reflecting the fact that growing numbers of Baby Boomers have now paid off their mortgages.

At the same time the number of householders who owned their home with a mortgage or other loan dropped by 746,000.

Matthew Pointon, property economist with Capital Economics, said the rate of home ownership in the UK had been dropping for the past seven years because property prices were overvalued by most measures.

He added: “Although we expect owner-occupation will remain the most popular tenure, the homeownership rate is likely to continue to decline over the next few years.”

http://www.telegraph.co.uk/property/propertynews/10006239/Home-ownership-falls-for-first-time-in-nearly-100-years-ONS.html