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Alternatives to a Traditional Mortgage

Katie Cullen
Written by Katie Cullen
10th January 2017 (Last updated on Monday 19th November 2018)

While a mortgage is the easiest and most traditional way of financing the purchase of a property, there are four main alternatives to a mortgage.

Some of these alternatives are trickier to come by than others, and others are not overly recommended.

This article will cover the following points

What is Seller Financing? What is the Rent-to-Buy Scheme? What is the Shared Ownership Scheme? Borrowing on Your Whole Life Insurance Policy

What is Seller Financing?

Seller financing is a method of financing your home in which you repay the property seller in monthly instalments rather than repaying a mortgage provider. This method has both positive and negative impacts for buyers and sellers.

Ultimately, buyers will not have to be accepted for a mortgage, meaning the process could be a lot quicker – however, the buyer still has to convince the seller of their credit-worthiness.

This could be appealing to a seller, as they will keep all of the interest that normally goes into the pockets of lenders. While there wouldn’t be much difference in costs for you, this could present itself as an opportunity for sellers to gain more money than they normally would have done.

That said, the seller will obviously not be paid in a lump sum which could pose difficulties if they are in need of that money. Likewise, the seller will have to collect payments from the buyer every month over a long period of time. Simply put, some sellers may not want to become lenders and put in the added legwork, no matter how big or small.

Solicitors fees will also have to be taken into account when considering seller financing. While this alternative to a traditional mortgage eliminates bank fees, you may find yourself facing increased legal fees.

What is the Rent-to-Buy Scheme?

The rent-to-buy scheme was introduced as a way of helping first time buyers purchase their own property.

The government-backed scheme allows tenants to stay in a property for up to five years and pay rental at 20% below the market value. This allows the tenants to save up money for their first home.

At the end of the five-year maximum tenancy, the tenant has a choice to buy the property outright, or part-buy the property under shared ownership.

The tenant would otherwise have to move out if they choose not to buy the property.

This scheme is good if you are more focused on saving money over a period of time. It allows you to build up your credit history and save for a healthier deposit.

However, you still do not own a property and will be paying rent monthly that does not contribute to anything in the long-term.

What is the Shared Ownership Scheme?

Similar to the rent-to-buy scheme, this government-backed scheme allows first-time buyers to purchase part of a property, with the prospects of owning the whole house at a later date.

A drawback of this scheme is that you again will still have to pay rent on the part of the property that you do not own, on top of any mortgage repayments. However, the amount of rent would be substantially lower than the usual cost of renting a property, as you are not renting the whole house.

Shared ownership can work alongside a traditional mortgage and lowers your LTV, making it easier to be accepted when applying.

Borrowing on Your Whole Life Insurance Policy

This method has been highly discouraged by experts if not done correctly, but can still be fruitful if you know what you are doing.

Insurance providers will allow you to borrow on your whole life policy, of which will lower your death benefits. Unlike mortgage repayments, you do not have a repayment schedule, nor do you technically have to repay at all.

However, providers can charge interest on your loan, which will then be added monthly to your death benefit. If you do not make high enough repayments, your insurance will become void and you may end up paying a lot more than you bargained for.