Vendor finance

What is vendor finance?

Family with bad creditVendor finance is the term used for a range of methods to buy a home without using a standard bank loan. Typically this involves the seller (vendor) or a private investor helping you with either a rent to own, instalment contract (wrap) or by financing your deposit.

Why use vendor finance?

  • You can buy a home now!
  • You don’t need a large deposit,
  • You can delay paying your stamp duty,
  • You benefit from the property rising in value,
  • Easy to qualify for even if you have bad credit or trouble proving your income.

Who is vendor finance for?

Vendor finance is the perfect solution if you can’t qualify for a home loan from a bank. If you can qualify with a major lender then it is better that you apply for a standard mortgage.

The people that often apply for vendor finance often:

As you can see this method of financing a property can help a wide variety of people to own their own home regardless of if they qualify for a bank loan or not.

What are the requirements?

Not everyone will qualify for rent to own or vendor finance. The main qualifying criteria are:

  • You must have at least 3% of the purchase price as a deposit,
  • You must be able to afford the loan,
  • It is preferred that you are buying a house. Units & vacant land are considered on a case by case basis.

Overall your situation must “make sense”. If you clearly cannot afford the repayments or you do not have a good explanation for your poor credit history then you are not yet ready to buy a home.

Apply for vendor finance

Our mortgage brokers are experts in helping people to qualify with a major lender, even if you don’t meet the criteria for most banks. We can complete a full assessment of your situation and then if you do not qualify with a prime lender we can refer you to a specialist vendor finance company.

If you would like to find out how you can own your own home without the need for a bank then please call us on 1300 889 743 or enquire online and one of our staff will call you to discuss your situation.

How much can you afford?

There are two methods that can be used to work out how much you can afford to buy a home for. Firstly it is best to work out how much you can afford to repay each month. Then work backwards to work out the amount you can afford to borrow.

The second method is to use a serviceability calculator. We recommend that you use the same calculators used by the banks to assess someone’s ability to repay a mortgage. These are usually more accurate than generic online calculators.

Our staff have access to these bank serviceability calculators and can help you work out how much you can afford to buy a home for. Please call us on 1300 889 743 or enquire online to find out how we can help you.

Types of vendor finance

Standard vendor finance / instalment plan
This is also known as a “wrap”. In this scenario you will work with a private investor to help you buy a home. When you find a home that you would like to buy then the investor will negotiate to try to buy that house for less than the market value. The investor buys the home in their name and then sells it to you at a higher price with an extended settlement.

Instead of paying the investor in one lump sum in six weeks time you pay the investor in instalments over several years until you are able to qualify for a loan with a bank and refinance the investor out. This is the most common type of vendor finance purchase in Australia.

Rent to own / rent to buy
This is where you have an agreement with the investor to rent the home from him at higher than the normal market rent. In return you have an option to buy the property at a later date, for a set price. This is ideal for people who will qualify for a bank loan in a few years time and who would like to “lock in” their dream home now.

Financed deposit
In this scenario you will borrow 80% of the property value from a bank as this is easier to qualify for than a 95% home loan. The remainder will be lent to you by the vendor (seller). You make payments to the bank and also to the vendor with the aim to refinance the vendor’s loan to a standard bank loan within two to five years.

If you go for this option then you must be committed to making large repayments to repay the vendor’s loan as quickly as possible.

How much does it cost?

The terms of the vendor finance agreement will be negotiated between you and the investor directly. There are no hard and fast rules.

As a rough guide you will buy the property for between 10% and 20% more than what the investor paid for the property. The interest rate on the amount you owe to the investor will usually be at a 1% to 4% higher margin than the interest rate that the investor pays to their bank. So if current bank mortgage rates are at 5% then you would expect to pay 6% to 9% p.a.

The cost of your purchase will depend on how high a risk you are to the investor and how quickly you can refinance out of the vendor finance scheme. If you are able to refinance quickly then the investor may be able to offer you more favourable terms.

Is the First Home Owners Grant available?

You may be able to apply for the First Home Owners Grant (FHOG) at the time that you enter into a vendor finance agreement. This will depend on the state that you are in and the nature of your finance agreement or structure of your purchase. Please discuss this with your state government or with your solicitor to find out if you are eligible for the grant.

In most cases the grant will form part of your deposit and will be paid to the investor. If you have a 5% deposit already then you may be allowed to keep the FHOG to pay for renovations, legal fees and moving expenses. You can negotiate with the investor to find a win-win agreement which allows them to have a significant deposit and for you to have the funds required to pay for your expenses.

Refinancing back to a bank

There are no hard and fast rules as to when you can refinance to a standard bank loan. However you must have a clear credit history, stable employment and an excellent history of paying the vendor finance instalments on time and in full.

You must owe less than 80% of the property value to be able to refinance to a conventional lender with a high chance of success. If you owe 80% to 90% of the property value then you may be able to refinance however you will need to meet more stringent lending criteria and will require LMI approval.

If you still do not meet the criteria of conventional lenders then you can apply for a loan with a non-conforming or specialist lender. This is usually cheaper than vendor finance, however is still more expensive than a mortgage from a bank.

Do not rely only on your property rising in value to help you get down to owing 80% of the property value. You should commit to making large additional repayments to reduce your debt. Please keep in mind that bank valuers are conservative so it may take a little longer than you predict to reduce your debt enough to refinance.

Obtain legal advice

Although vendor finance is a very powerful method that can be used to help you own your own home, it can be a disaster if you do not understand the terms of the agreement. Please seek independent legal advice prior to entering into an instalment plan, rent to own or financed deposit scheme as they are legally binding contracts.

We have taken great care to ensure that the general information on this page is accurate, however vendor finance agreements are negotiated between you and a private investor so each agreement will vary.

The terms of your finance are likely to be at least slightly different to what we have written above so please take the time to understand your agreement fully before deciding if it is for you.

You must also be aware that if you miss several payments with a vendor finance instalment plan or rent to buy scheme then you may lose the deposit you have paid and the right to purchase the property. Private investors do not often have the financial means to hold onto a property if you are not making your repayments. For this reason they will be less lenient with you than a bank would if you missed payments on a mortgage.

How can we help?

Our mortgage brokers are experts in helping people who do not meet standard bank criteria to own their own home. Please call us on 1300 889 743 or enquire online to find out if you qualify for finance.