French rent to buy is the alternative new solution to financing a property purchase when a mortgage is not possible.
Rent to buy contracts are new to France, but we are much more established in Italy where we have been arranging rent to buy contracts through our Italian mortgage broking office.
Rent to buy works for any property type, so let’s get into the detail of how it could work for you.
French Rent to Buy Perspectives
To understand French rent to buy contracts it’s important to understand how they differ from conventional mortgage financing.
With a mortgage, the funds come from a mortgage lender which, in France, is normally a bank.
With rent to buy there is no real purchase finance but a contract which is a hybrid between a financial options contract and deferred purchase similar to an HP contract.
Here’s how it works.
The contract itself has a relatively simple form, such as a 10% initial deposit followed by up to 120 monthly payments covering the outstanding capital and interest at a rate of around 3.5%. However, unlike a bank provided mortgage, all elements of the contract are negotiable between the buyer and seller so the best deal for both parties can be negotiated.
From the buyer’s perspective, the process is much simpler than getting a mortgage. The contract can be concluded without any of the bank formalities such as proof, longevity and source of income. There are no limitations as to the type of property that can be acquired, including operating leisure businesses such as restaurants, hotels and fishing lakes.
From the seller’s perspective, provided they do not need to immediately realise the full value of the sale, it can be an effective way to reduce tax, gain an investment income and attract more than just cash buyers.
In practice, there are some situations which fit a rent to buy contract better than others, so let’s look at what works and what does not.
The ideal property is one which is a:
- Business from which the owner wishes to retire.
- A second home.
- An inheritance.
- A property in an illiquid location which has been on the market for some time without buyer interest.
Properties that do not fit French rent to buy contracts are those that need to be sold to enable the seller to immediately purchase a replacement, such as is the case with main homes.
French Rent to Buy – Who Gains
Because the contract is normally negotiated between buyer and seller through a negotiator, who may be a lawyer, each contract will be unique. However, there are some common elements and principles that make it possible to compare rent to buy with mortgage finance in terms of costs.
Overall, the cost of establishing and legally registering a rent to buy contract will be around 3% of the property price. This is quite similar to the cost of registering a bank mortgage contract if you add together the bank’s dossier fee and the legal work by a notaire to register the charge at the Banque de France.
There are, however, some added benefits that can reduce the overall cost of the transaction:
- Many contracts are arranged directly between buyer and seller without the intervention of an estate agent. This can reduce the total transaction cost by anything from 4% to 9%.
- There can be a capital gains tax saving for the seller because the payments do not all fall in the same tax year.
- It may be possible to defer the notaire’s fees until the final contract payment.
- Formalities, such as the requirement for bank mortgage protection insurance, are minimal thus less costly.
- In the case of business transfer the contract can be written in a very similar way to the French murs and fonds contract so that both parties are better protected.
- There are no ancillary charges such as early repayment penalties.
- Both the buyer and seller are completely protected because the contract is legally registered and enforceable and contains failsafe mechanisms in the event of a potential default.
How to Arrange a French Rent to Buy Contract
Unlike obtaining a mortgage from a bank, a rent to buy contract is negotiated directly between the buyer and seller so it can be structured in the best way to meet both sides needs. In practice, though buyer and seller can do this without help, most contracts are negotiated through an independent intermediary to save time and avoid mistakes in drawing up the contract.
Buyers will usually proceed by establishing a draft contract which meets their financial capability and then search for a property, perhaps using a property finder or business transfer agent.
Sellers will typicaly note in their property details that they will accept a rent to buy contract.
In either case it is a good idea to contact a specialist with experience of setting up rent to buy contracts at a very early stage. It is always easier to reach a satisfactory agreement if both parties start from a sensible position based on the possible.
If you would like to discuss French rent to buy in more depth just complete our Get a Rent to Buy Quote form below.