Rent-To-Own Homes | Home Loan Experts

Homeownership is increasingly becoming out of reach for many Australians, due to growing living costs and rising housing prices.

Many aspiring homeowners are looking for alternatives to the near-impossible task of saving for a deposit, and rent-to-own plans are high on their list of options. To help you decide if this strategy is for you, let’s take a look at what it entails, along with some pros and cons.


What Is Rent-To-Own?

Rent-to-own (also known as rent-to-buy) agreements give tenants the option to buy a home at the end of a pre-determined renting period (usually two to five years), for an agreed-upon sum. It allows would-be home buyers to move into a house right away, with several years to work on improving their credit scores or saving for a down payment before trying to get a mortgage.

Furthermore, committing to a future price protects the buyer against increases in property values, potentially allowing them to get a better deal on the home. However, if the market falls out of favour during the renting period, this can work against the buyer.

While rent-to-own schemes often sound appealing to those trying to buy into the property market, the terms and conditions may not suit all potential buyers. It’s essential to consult an expert who can clarify the contract and your rights before signing anything.


Important: Lease-Option Contracts Vs. Lease-Purchase Contracts

There are two types of rent-to-own contracts. You can choose the one that you think works the best for you. In a lease-option contract, when your lease expires, you have the choice to purchase the home or walk away without having to buy. With a lease-purchase contract, you are responsible for buying the property and cannot back out of the deal.


How Much Does A Rent-To-Own Home Cost?

Rent-to-own schemes have two components: a standard rental agreement and an agreement to buy (which can be optional). Homeowners who want to buy a house through a rent-to-own scheme sign a contract with a seller that allows them to buy the house after the renting period.

Most of these plans will demand a deposit, which many homeowners obtain part of by applying for the First Home Owners Grant or the First Home Loan Deposit Scheme.

Participants pay rent (typically higher than the market average) and a monthly charge for the right to buy the property at the end of the contract. Some rent-to-buy contracts also include other costs for the buyer, such as building maintenance, stamp duty and insurance.

The amount of money paid for the right to buy – which often goes into the tens of thousands – is then usually subtracted from the final sale price. Sometimes, a buyer can arrange to have a portion of the total rent payments deducted from the sale price as well.

Example: Let’s say you sign a three-year rent-to-own deal with a $600,000 agreed future price and a deposit of $30,000 from your savings plus $20,000 from a First Home Owners Grant.

In this case, the landlord may decide to charge you $450 a week in rent (above the average for the area), plus $100 per week for the option to buy the property at the end of the three-year lease. With a year lasting 52 weeks, this means you’ll shell out $85,800 during the first three years, including $70,200 in rent and $15,600 in option payments.

$450*52*3 = $70,200
$100*52*3 = $15,600
$70,200+$15,600 = $85,800

If the contract indicates that the option payments go toward equity in the house (which is not a given) but none of the rent, you’ll need a $534,400 home loan to buy the house at the end of the three-year lease ($600,000 less the $50,000 deposit and $15,600 equity).

$600,000 – ($50,000+$15,600) = $600,000 – ($65,600) = $534,400

Once you reach the end of the lease part of the contract, getting a home loan to buy the property works the same as with any other home loan. Before deciding whether or not to approve your application, the bank will check your eligibility against its lending requirements. If you receive approval, the property’s title should be transferred to your name as the legal owner once the settlement is finalised. You will then need to make regular repayments until the loan is paid off.

Use our mortgage calculators to get a good sense of what to expect from your bank or lender when you rent to buy. If you want to clear up any doubts, call us on 1300 889 743 and we will connect you to our expert brokers.


Rent-To-Buy: Risks And Benefits

It’s worth weighing up an important question: Will you be able to afford the higher-than-average rent, option-to-buy fees, and any other additional costs associated with an RTB scheme, such as insurance and maintenance?

Always seek independent legal or financial counsel before signing any RTB contract, especially considering the potential risks and high costs associated with these schemes.

Here’s what the advantages and disadvantages look like:

Benefits

  • Through an RTB scheme, you can potentially get a foot on the property ladder by renting a property you would like to buy eventually.
  • You can delay the need to secure finance until the end of the rental period.
  • Meanwhile, you can work on improving your credit and saving money for a down payment while locking in the house you want.
  • You get to create some equity if the option money and/or a percentage of the rent go toward the purchase price.

Risks

  • If the landlord uses the property as security for their debts and defaults on their loan repayments, the security holders may seize the property.
  • You don’t own any part of the house until the final rental payment is made and you purchase the home.
    When the time comes to buy the property at the end of the rental agreement, you will still need to qualify for a home loan.
  • You aren’t on the title, so if you can’t make a payment, you risk losing any equity you’ve built up, as well as the contract.
  • You might end up paying an inflated price for the property.
  • Even if you make all of your rental payments, you may still be unable to acquire a home loan, and you would lose not only the property but also all of the money you’ve paid.

What Steps Should You Take When You’re Considering A Rent-To-Own Property?

If you’re convinced rent-to-own is the right option for you, you’ll need to take extra precautions to protect your interests. Here’s a rundown of how the rent-to-own process works.

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