Start-up wants to get ‘bank of mum and dad’ lending to first-time buyers

A new start-up is offering a “rent now, buy later” option for young people and those with irregular earnings looking to get into the Irish property market.

Homeoptions says it is offering a "competitive and smart alternative to home ownership" by allowing home seekers purchase an option to buy on a property of their choice, while living in it. And, at a time of rapidly rising rents and double-digit increase in property prices every year, it says aspiring homeowners using its product will have both the purchase price and their rent frozen for five years.

Under its three-way model, “home supporters” – ie parents and relatives of the person or people looking to buy a home – will put up about 35 per cent of the purchase price of the property in a loan that will earn some interest and be repaid.

The new rent-to-mortgage product is aimed at putative first-time buyers who find that they are unable to get a mortgage, perhaps because they are freelance or working on contracts, or because current lending rules are just too restrictive.

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The product is being launched by Ben Hoey, a former chief financial officer at Merrill Lynch's Dublin operation and managing director of US real estate group Kennedy Wilson Europe until 2015, and Philip Farrell, who was chief executive of estate agent group Real Estate Alliance until 2015.

Mr Hoey says he got the inspiration for the idea from his own family, and in helping his children get on the property ladder.

“I want to use it myself; it suits me,” he said.

While there have been previous efforts to introduce rent-to-mortgage schemes in the Irish market, this is first which facilitates investment from relatives of the property buyer.

"We're a landlord who rents properties with the option to sell," as Mr Hoey sees it. As such, his business is not regulated by the Central Bank.

Select a property

Under the Homeoptions model, a would-be homeowner selects a property for sale that they would like to live in. Currently, this must be in Dublin or its commuter belt, and in the € 300,000 to €1 million price range.

Homeoptions then acquires the property in conjunction with that person’s “supporters” – ie the family and friends – who will typically put up about 35 per cent of the purchase price as a loan, attracting annual interest repayments of 3 per cent.

“Supporters neither lend nor gift to home seekers. So you can lend, confident that you will be repaid,” the company says.

The remaining funding will come from an Irish bank, organised through Homeoptions.

As part of this transaction, the aspiring homeowner pays Homeoptions a premium – from 6 per cent of the property’s value – to obtain the right to buy the home at a later date.

The hopeful buyer can then move in immediately, avail of a 1 per cent cashback of the purchase price to help furnish it, and rent it at a fixed price – typically based on a yield of about 6 per cent – for between two to five years.

If the person then goes ahead and purchases, or “exercises the option”, the premium will be deducted from the sale price.

Fixed purchase price

The purchase price is fixed at the outset, so if the price rises, the tenant will benefit from being able to purchase it at a lower price. If it falls, the tenant could be paying above market value for the property if they wish to purchase at the end of the term.

But they have the option of walking away from the deal, in which case they will lose their original 6 per cent.

For “supporters”, their investment will be repaid when the option to buy is invoked or when five years have elapsed, provided that property values have not fallen below the agreed purchase price at the end of this period.

For the company, Homeoptions, it stands to benefit on two fronts: from the rental income (minus the supporters’ 3 per cent return) and via a 4 per cent fee it charges when the option is exercised.

Applicants can apply for the scheme either directly with Homeoptions or via a mortgage broker.