How hire purchase works: Simple and understandable explanation

How hire purchase works is explained quite simply. A simple rental purchase is particularly interesting when there is no equity. In this article we have summarized how such a hire purchase can be designed.

How hire purchase works: Simple and understandable explanation

In simple terms, buying a lease is buying a home in installments. You only pay directly to the seller here.

• When buying a lease, you as a tenant and resident can buy the house or apartment you live in. Provided, of course, that the owner wants to sell the property.
• The payment of the purchase price is not paid as usual when buying a property at once. Furthermore, you are not the owner of the property.
• You pay the price for the residential building in the form of a predetermined rent.
• A notary must also be involved in the hire purchase. Without a notarial commitment, the contract would not be binding. This applies to the purchase contract as well as to the rental contract that is also to be concluded. Both the purchase and rental price of the property must be notarized. The same applies to how the payment methods, amounts and the due dates of the installments.
• The rent you pay will be added to the purchase price. You "only" pay the monthly rent and thus the purchase price.
• There are two options for you and the seller: Your hire purchase can be designed so that the entire purchase price is covered by your rent in the period discussed in advance. This is how the rental price is calculated, which is based on the purchase price.
• The other option is that you make a rent with the seller that is less high. The time in which you pay the rent is fixed here, and the purchase price is paid in full after this time. At the end of this term, you pay the remaining amount to the seller at once. A variant here is that you pay a down payment at the beginning, so that the term of the lease expires with no residual debt.
• However, there are two types of hire purchase: First, this is the classic hire purchase. The other option is to rent the property with a purchase option. The classic hire purchase contract is as described above. You conclude a sales contract and a rental contract at the same time. You replace the purchase price with the rent.
• However, if you rent with the option of buying, you do not have the obligation to buy the property. In this case too, the way to the notary is inevitable. You pay the contractually agreed rent. In return, you get a purchase option entered in the land register of the district court. The option remains valid until you cancel the rental contract. Then you have to make the purchase option valid or you can simply let the deadline pass.
• As with any house purchase, the same applies to hire purchase that the property in question only becomes your legal property as soon as you have paid the full purchase price.

Rent purchase has advantages and disadvantages

A hire purchase can be beneficial, but it also has its risks.

• In most cases, you pay a higher price for the property when buying a rental. Classic house or apartment purchases are usually cheaper overall.
• Your monthly rental charge can be very high. Here everything depends on the term, the down payment or the final payment. A very high final payment naturally guarantees you a lower rent if the seller agrees.
• As a tenant, you have a clear advantage when buying with the purchase option: You can always say that you are not interested in purchasing the property. In addition, the seller cannot sell the property without your consent as long as your purchase option is in the land register. So the seller can miss lucrative offers.
• The disadvantage for you is that as a rental buyer you hardly have any subsidy options. In particular, you should take this into account when considering the new child benefit granted by the state.
• In addition, as a tenant you have no say in the matter should the landlord plan a conversion. This applies until the complete purchase price has been paid in full. An exception would be if you had this say in the notary contract.
• There is also a not inconsiderable risk for you when buying a rental: If the seller has money problems and would go into bankruptcy, the house could be auctioned off. Your rent paid up to the time of the auction is usually lost here. Under certain circumstances, the house purchase would not come about.

In the next article, we show what costs you can expect when building and buying a house.