Property leasing is one of the options available to both businesses and natural persons to purchase a property. We talk of residential property leasing when we refer to the purchase of property for residential use, as the main residence.
What is property leasing
This form of contract offers the use of a property by paying periodic installments to the owner, generally a finance company or a bank. Once the installments have been paid in the agreed period, we have the possibility to pay a maxi-installment, established in advance in the contract, to become the full owner of the property. The contract may also include an advance payment (where foreseen), also known as a maxi initial installment.
The main characteristic of the leasing instrument is the detachment between the owner and the user. Until the time of the final redemption, the user does not consolidate the property among his own assets.
Property leasing is therefore a kind of rental contract that allows the “lessee under a finance lease” to use the property by paying a periodic fee and, at the end of the agreed period, to have the opportunity to redeem the property and become the owner. The amount due for redemption must be agreed at the time of contract signature, and is generally calculated as the difference between the amount already paid and the estimated value of the asset on that date.
This popular form of contract, used for years in the automobile market, allows the party using the property to decide, at the end of the agreed period, whether to “return” it or become the owner.
A property leasing operation can take place only through a bank or financial company which becomes the owner of the property chosen by the client. Thereafter, the client undertakes to pay the installments calculated according to an interest rate set out in the contract.
Residential property leasing
Residential property leasing, referred to residential buildings used as the main residence, was introduced by the Italian Stability Law of 2015, offering a series of tax advantages, including a 19% deduction of the installments and related accessory charges, as well as the purchase cost when exercising the final redemption option, as well as a 1.5% reduction of the registration tax. These advantages expired in December 2020, and currently (May 2021) have not been renewed.
Property leasing vs. mortgage
Property leasing is a flexible solution that can be adapted to suit the client’s needs, and this is why it can be used as an alternative to a mortgage, after an appropriate assessment of the pros and cons of both options. Let’s have a look at the advantages and disadvantages of each one.
The advantages of property leasing
- It minimizes the initial outlay,
- contractual certainty of the amount to pay at the end of the agreed period,
- no notary fees like those required when taking out a mortgage, and no mortgage registration costs,
- the leasing installments are partially deductible,
- a leased asset cannot be seized,
- the property does not constitute part of the income for as long as the leasing contract is active,
- in the case of temporary difficulties - loss of work in the case of a natural person or lack of orders in the case of a business - it is possible to suspend the payment of the periodic fee (only once and for a maximum of 12 months) without any commissions or additional charges.
The disadvantages of property leasing
- The lease contract is generally for no more than 15 years,
- the installments are generally higher than those of a mortgage or a simple rental contract,
- the leased property cannot be sold,
- the user has all the risks and benefits of the use of the property. For this reason, lease contracts usually include the user’s obligation to take out an insurance policy to cover any damage to the property or third parties.
The advantages of a mortgage
- The funding for purchasing a home can last up to 30 years,
- the property is owned immediately, and so it can be sold, renovated or rented out,
- lower interest rates are applied to mortgage installments than to leasing installments,
- there is no final redemption.
The disadvantages of a mortgage
- Notary expenses have to be paid immediately,
- immediately becoming the owner, home ownership taxes (IMU) have to be paid,
- a down-payment of at least 20% of the value of the property has to be made, as a mortgage can cover no more than 80% of the value. We should also consider that banks tend to fund a lower percentage, so the down-payment required will probably be greater. Furthermore, accessory costs have to be considered,
- the cost of the property appraisal is borne by the client even if the bank refuses to grant the mortgage.
Notariato.it, Guide to residential property leasing