Most people buy a house using a standard mortgage from a bank of building society, but your options don’t begin and end there. There are alternative ways to finance a house purchase, although it’s important to weigh up the advantages and disadvantages on each occasion.
Seller financing
Seller financing is where a buyer pays the seller of a house a monthly fee. The advantage for the seller is that they can charge interest and, in time, receive more than the amount the house was sold for.
The buyer will usually pay no more than if they were repaying a standard mortgage. The disadvantage for the seller is that they are responsible for the collection of the payments, which will be over a number of years. If the buyer falls behind on their payments then forcing the buyer to pay is a complex and a long process.
Legal fees for the buyer will probably be higher for this non-standard financial arrangement.
Rent-to-buy
Rent to buy schemes are where rent at a discount is paid for a five-year period and then the tenant can purchase the property. The idea of a rent-to-buy scheme is that it allows people time to save up for a deposit to purchase their home with a standard mortgage. The disadvantage is that if they do not manage to save enough for deposit, or if they are turned down for a mortgage because of a bad credit record, they may have to leave their home. All rent paid for during the five-year period is lost and has no influence on the buying price of the house.
Shared ownership
In a shared ownership arrangement, the household buys a percentage of a home using a mortgage and rents the rest. Households expect that as their income goes up in time, then they will be able to purchase the rest of the house at a future date. As in the rent-to-buy scheme, any rents paid are lost.
Borrowing on a whole-life policy
If you have a life insurance policy, you can borrow money on it to help to buy a house. This will reduce your death benefits and interest will be charged on the payments.
A standard mortgage
The simplest and safest way to buy a home is through a standard mortgage which, in the long run, will be cheaper than rent-to-buy, shared ownership and life insurance policy borrowing. A mortgage is more secure than seller financing.
