Uncertainty about property prices, low wage increases, widespread debt and an uncertain economy make that first rung of the property ladder a distant dream for many in the UK.  But a new form of property agreement called a Lease Option could be a light at the end of the tunnel for cash-strapped first-time buyers.

The concept of the option is well-known in the financial world, and can be applied to shares, land or property. Having an option gives the holder the right to buy or sell something at an agreed price after an agreed period. The holder usually pays a premium to be granted this right, but is not obliged to exercise it.

Lease Options on property are already popular in the US and other overseas markets. All the legal work has been re-written for the UK market to ensure that all parties are protected.

So how does it work? A Lease Option agreement involves a tenant being given the option to buy a property at an agreed price at the end of a given rental period, usually 36 to 60 months. The renter-buyer pays a Option Fee up front, about 2-3% of the market value of the property this is preferable to putting up a full deposit of 15-25% straight away.

Case studies
Take first-time buyers Janet and Simon as an example. They are looking to rent a flat worth £175,000 in January 2010. Under a Lease Option agreement the owner offers them the right to buy the flat for £200,000 in January 2015, for a Option fee of £4,000.

If they agree to the lease option, Janet and Simon can sleep easy while other property prices move further and further out of their grasp. They get to test out their property by living in it before they decide to buy, and if soaring prices bring the value of their flat up to £204,000 by 2015 then they've clearly got themselves a good deal.  Over time, property prices have always grown.
If however, the property has not reached the value set at the outset of the Option, then Janet and Simon have two options.  Firstly, they could exercise the extension to the Option for a further set number of months or walk away from the Option.

Agreeing a price in advance makes it easier for buyers to plan financially and save for a full deposit. A longer lease and the prospect of ownership provides security and reduces the amount of 'dead' rent money going down the drain. Of course, if you're the itchy-footed type, with frequently changing circumstances, then being tied into a long lease may not appeal.  The Rent and an extra payment towards the deposit would be paid on a monthly basis.

Another bonus for the renter-buyer is avoiding the nasty business of buying property on the open market. A deal agreed in advance, on a property you're already occupying means no complicated chains or moving costs.

Lease Options don't just have to be for first-time-buyers. They can provide a place to live at a guaranteed price and time to sell your existing property. This is useful if your property is slow to sell but you need to relocate quickly.

A Lease Option is not completely risk free though. It only saves buyers money while prices are rising. If the value of Janet and Simon's flat ends up declining over those three years, they're left with a difficult choice: Pay over-the-odds for the property, or forfeit the option to buy and start again from scratch.