Saving a deposit for your dream property may seem out of reach for new homebuyers and many are turning to alternatives such as rentvesting or rent-to-own schemes to get into the property market sooner.
What is rent-to-own?
Rent-to-own schemes, aka rent-to-buy schemes, are popular in the US but are a relatively new mortgage product on the Australian market, with few legitimate operators. They’ve also attracted plenty of media attention and usually for the wrong reasons, with so-called schemes involving bad actors, which are little more than scams in reality.
A rent-to-own scheme allows a tenant to buy the property they are renting once the lease expires, for a previously agreed-on price with the seller. The rental period is usually between two to five years.
At the end of the rental period, the buyer, who will have built up some equity in the property through contributions on top of rent known as an ‘option’, takes out a mortgage with a provider and pays out the rent-to-own platform.
A rent-to-own scheme sets the future sale price, meaning the buyer could get the property for a cheaper price than they could currently on the market or it may cost them more, depending on the state of the market.
Rent-to-own schemes are currently only available in select areas of the east coast of Australia.
Costs of rent-to-own schemes
Rent-to-own schemes have two components – the standard rental agreement and an option to buy. The costs can vary wildly, but these schemes have a reputation for charging way above the market rent. Participants also need to pay for an ‘option’ to buy the property at the end of the tenancy agreement, which is usually tacked onto the regular rent payments. As with all rental prices, however, the exact amount of rent and the option will vary depending on the property and suburb.
The total option amount paid over the rental period is usually deducted from the sale price. This means that, for example, if you have agreed to buy a $400,000 property after renting for three years and you pay a weekly option amount of $100 on top of your rent, you will have paid $15,600 off the $400,000, meaning your mortgage is only $384,400.
Having said that, not all contracts are the same and it goes without saying that you need to check the fine print of any contract and have it checked by a mortgage expert and a solicitor.
Different providers offer different rent-to-own models.
Renting-to-buy established properties
OwnHome, launched in February last year with the backing of the Commonwealth Bank, deals only in established properties and targets higher-income first homebuyers struggling to save up a deposit for their desired property.
A customer picks a property they like and OwnHome then purchases it, assuming the applicant ticks all the usual boxes regarding things such as income and credit history, and the property meets their criteria. The maximum price of a home in Sydney the company will finance is $1.8 million.
After a minimum three-year rental period and a maximum of seven years, the buyer takes out a commercial mortgage and buys the property from OwnHome at a price based on an increase in value of 3.8 per cent per year (or 0.32 per cent each month). So, if OwnHome originally paid $750,000 for the home and the tenant chooses to buy it three years later, the house would cost just under $840,000.
Buyers also pay a starter fee of 2% of the property value ($15,000 for a $750,000 home, for example), which does not go towards equity in the property.
“Build to rent to own”
In Victoria, developer Assemble Communities has a different model, building apartments aimed at households in the low- to moderate-income bands. These apartments can take up to two years to be constructed and tenants who qualify for the scheme can rent for five years and then choose to buy at an originally agreed-upon price.
Importantly, this model — which Assemble Communities refers to as a “build to rent to own (BTRTO) housing model” — allows the would-be buyer to walk away with their savings intact if they opt not to go ahead with the purchase at the end of the rental period.
» MORE: Should you buy or rent?
Are rent-to-own homes a good idea?
Rent-to-own schemes are still relatively new in Australia and those contemplating investing in one need to be very wary of the pitfalls.
- No need for a 20% house deposit.
- Set prices allow for more certainty.
- Ponitally easier loan process.
- More borrowing power.
- First Home Owners Grant eligibility.
Rent-to-own schemes do not require a deposit as such because the option amount being paid contributes to paying the principal while paying a higher rental amount demonstrates a commitment to paying off a home loan once the rental period is over.
Additionally, if the property increases in value, the capital gain will give the buyer more borrowing power.
You are also entitled to government funding such as the First Home Owner Grant if you purchase a property through a rent-to-buy scheme.
- Extremely high rent.
- Lots of fees, charges and costs.
- The property could fall in value.
- You still need a home loan.
- Very high fees for withdrawing from the scheme.
- Scams abound.
As previously mentioned, the rents are usually much higher in rent-to-buy schemes than the standard rate for the area you are living in. You will also still need to take out a home loan at the end of the rental period, and if the property falls in value you could find yourself seriously underwater financially.
If the value of the home has risen less than 3.8% a year or has fallen, as the buyer you are not required to complete the purchase, but you’ll have to pay a large fee for withdrawing from the contract and it could comprise a big percentage of the equity you have built up through your option payments.
There’s no shortage of fees and charges, too, and some rent-to-buy contracts require the participant to cover expenses such as building maintenance, stamp duty and insurance.
There are also scams that the buyer needs to be very wary of. Concerns about such schemes and their scope for abuse of people led to a report by the Consumer Action Law Centre in Victoria in 2016 calling for a ban on such schemes and the introduction of the same consumer protections that exist around conventional mortgages. This in turn led the Victorian Government to enact legislation to prohibit some of the problems associated with predatory rent-to-buy contracts in 2019.
The risk with these schemes is that, as the buyer, you don’t own the dwelling until you take out a standard mortgage to repay the provider, so you could lose the property and any equity you contributed in the advent of a downturn. The sorts of concerns that led to the Victorian regulations still exist in some forms, however, so you need to fully understand what it is you’re getting into before you go down the rent-to-own path.
Consumer Action Law Centre, “Fringe dwellings The vendor finance and rent-to-buy housing black market,” accessed March 14, 2023.
Consumer Action Law Centre, “Newly passed bill officially bans rent-to-buy and vendor finance schemes from the Victorian housing market,” accessed March 14, 2023.
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