The phrase “mortgage recycling” describes what is starting to happen in the UK as a means to get round the inability of banks to provide mortgages. You could call this an environmentally friendly way of helping buyers to get their own home and bypassing the banking system until such time as it recovers.
Mortgage recycling is where the buyer takes over the mortgage from the existing borrower and then moves into the property, thus there is no need for the property buyer to apply for a new mortgage. In some countries such as USA and Australia, the buyer can have the vendor’s mortgage “reassigned” to them, thus making the process of mortgage recycling quite straightforward. In the UK it is not possible to “reassign” the mortgage, it remains in the name of the original borrower, which until recently has made it difficult for mortgage recycling. But there is now a solution to this, and here is how it works:
1 – The buyer finds a property they would like to buy, but it has to be a case where the existing vendor has little or no equity in the property, or they are willing to leave any equity they have in the property for a few years.
2 – The buyer takes out a lease option agreement where they have the right to buy the property at any time over say the next 3 years (the term can vary). The lease option contract will stipulate that the buyer will insure and maintain the property and pay the vendor the equivalent of their monthly mortgage payments – including any future increases or decreases in these payments.
3 – Whilst living in their new property under the lease option agreement the buyer works on improving their financial situation to take on a mortgage when the lending market improves. The idea is to have a lease option term that allows sufficient time for an adequate deposit to be saved, credit rating to be improved, etc.
4 – At or before the end of the lease option period the buyer obtains their mortgage and completes the purchase of the property.
The above steps are a very brief outline of how this works, more information can be found at simple2buy.co.uk/forum where experts are on hand to explain the process … more commonly referred to as “rent to own”. It really is a great way for people who cannot get mortgages today to get on the property ladder, and also for the vendor to release themselves from the ties of their property.
