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An alternative to consider when you want to purchase a property
Background
Yes, rent-to-buy agreements do exist in Malta, though they are not as common as traditional property transactions. Rent-to-buy schemes in Malta allow prospective buyers to rent a property for a set period with the permission from the seller, with the option to purchase the property at the end of the rental term. This can be an attractive option for individuals who may not yet have the funds or access to a mortgage but wish to secure a future home purchase.
These agreements typically involve a portion of the monthly rent being credited towards the eventual down payment of the property, helping tenants build up equity over time. Sellers benefit from a steady rental income during the lease period and a potential sale at the end of the contract in the form of a lump sum of the remainder.
It is very important that the terms of rent-to-buy agreements in Malta, as in other countries, are clearly set out in a formally recognised contract with a notary. This includes agreeing on the purchase price, the length of the rental period and how much of the rent will go towards the deposit. There are risks for both parties, particularly if property prices increase or if the tenant decides not to buy at the end of the agreement. Provision of what the outcome will be in cases like these needs to be stipulated in the contract.
In recent years, due to increasing property prices and challenges in obtaining mortgages, rent-to-buy has gained more attention in Malta as an alternative way for people to get on the property ladder. However, it’s advisable for both buyers and sellers to seek legal advice to fully understand the implications of such agreements.
Like the idea? Then read on…
Are you looking for a solution that benefits both parties? Perhaps you’re a seller struggling to find the right buyer, or a potential buyer who isn’t yet in a position to make a purchase. Rent-to-buy could be an option worth considering for your next property move.
As said, rent-to-buy is a widely used practice in many countries, offering buyers the opportunity to rent a property for a pre-agreed term with the option to purchase it at a later stage. This process is similar to a car lease, where renters pay a fixed monthly amount and at the end of the rental period, they have the option to buy – in this case, a house. Each monthly payment provides income for the seller and a portion of it contributes towards the property’s deposit.
The rent-to-buy process begins with the vendor and tenant/buyer agreeing on both the sale price and the rental price. Once an agreement is reached, both parties are bound to the terms for the agreed period, regardless of changes in the economy or property market. The agreed price remains fixed.
Each monthly rent payment contributes to the deposit. The rent is divided into two parts: the option fee and the rent premium. The option fee is an amount the seller receives each month, which will contribute towards the deposit if the tenant chooses to purchase the property. However, if the tenant decides not to buy, the option fee remains income for the seller. The rent premium, on the other hand, fully contributes towards the deposit.
Rent-to-buy is an attractive alternative for buyers who currently lack the funds to purchase a home or are facing difficulties in securing a mortgage. For sellers waiting to sell their property, this arrangement can provide a steady income stream, regardless of whether the property is eventually sold.
There are pros and cons
Like any property transaction, rent-to-buy comes with its pros and cons.
- Pros
- From the seller’s perspective, offering a property under a rent-to-buy arrangement can attract a broader range of potential buyers.
- Additionally, it gives the seller either a guaranteed buyer or continued income if the tenant does not buy at the end of the rental term.
- Buyers in these agreements are also more likely to take better care of the property and community since they are planning for the long term.
- For tenants/buyers, this type of agreement allows time to improve their financial situation and secure a mortgage.
- The rental period also serves as a ‘trial’ for the property and if any significant issues arise, the tenant can decide to walk away from the agreement without purchasing at the end of the term.
- Cons
- If property prices rise during the leasing period, a seller might regret entering into a rent-to-buy agreement, particularly with longer-term contracts, such as those lasting three years.
- The prices set in the rent-to-buy contract cannot be altered, which may benefit one party over the other as time progresses.
- Moreover, if another buyer comes along and wishes to purchase the property during the lease, the seller is unable to do so, as the rent-to-buy contract prohibits it.
Rent-to-buy is thus ideal for individuals looking to save on rental payments, as part of the rent contributes towards the deposit for the property. As said, it is not the norm in Malta and another factor is the dynamic nature of the real estate market, especially when it comes to growth and return on investment of immovable property. Although they are out there, not many sellers are willing to risk losing out on the capital growth that their property may inherently deliver over time… so it will take a very special owner that is willing to enter into a rent-to-buy agreement.
