Note: Vendor finance or rent to own finance isn’t for everyone. There are a few risks and higher costs involved so you should probably consider a no deposit home loan before going down this path.

What is vendor finance?

There are actually three different types of vendor finance.

Standard vendor finance / instalment plan

This is also known as a “wrap”. In this scenario, you’ll work with a private investor to help you buy a home. When you find a home that you’d like to buy, 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’re 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’ll qualify for a bank loan in a few years time and would like to “lock in” their dream home now.

Financed deposit

In this scenario, you’ll 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.

What are the risks of vendor finance?

Most of the risks of vendor finance revolve around your ability to afford the mortgage repayments. Vendor finance is a lot more expensive than a standard home loan and here’s why:

  • You’ll pay more to buy a property: You’ll have to pay 10-20% more than what the investor paid for the property.
  • Interest rates are higher: In some cases, the rates are at a 1-4% higher margin than the interest rate the investor paid their bank. So if current interest rates are around 5.00%, expect to pay 6.00% to 9.00% per annum.
  • The vendor holds the cards in negotiations: The cost of the purchase and your interest rate will depend on how high of a risk you are to the investor and how quickly you can refinance out of the vendor finance scheme.

Who is vendor finance for?

If you can qualify with a major lender then it’s better that you apply for a standard mortgage.

We strongly recommend that you consider a no deposit solution like a guarantor loan as a first option because they’re significantly cheaper and a much more straightforward loan process than apply for vendor finance.

The people that often apply for vendor finance often:

  • Don’t have genuine savings: Did you know that you may actually be able to borrow up to 90% or even 95% of the purchase price with a lender that doesn’t require you to have genuine savings?
  • Are self employed and only have limited income evidence or financials: There are certain lenders that can accept alternative income evidence so you can still get a home loan!
  • Have a bad credit history (a larger deposit is required): Depending on the size of defaults and the overall nature of your credit history, there may be lenders who will allow you to borrow up to 95% of the purchase price.
  • Have no credit history: Learn more about what a credit file is and how you can start building a credit history in order to apply for a home loan. It could simply mean opening a small credit card account and paying it off over a period of 6 months rather than applying for vendor finance today.
  • Don’t meet standard bank lending criteria: If your employment situation is out of the ordinary, you have problems with your credit history or there is something else stopping you from qualifying with a bank then a specialist lender may be able to help. Alternatively, a specialist mortgage broker with exceptional credit expertise and lender relationships may be able to build a strong enough case to get you approved for a standard home loan.

Yes, vendor finance is an option for you if you have no deposit but, as you can see, there may be other ways to get you approved for a mortgage.

What are the requirements?

Not everyone will qualify for vendor finance. The main qualifying criteria are:

  • You must have at least 2% of the purchase price as a deposit,
  • You must be able to afford the loan,
  • It’s preferred that you’re buying a house or units in a major city or regional area.

Overall, your situation must ‘make sense’. If you clearly can’t afford the repayments or you don’t have a good explanation for your poor credit history, then you’re not yet ready to buy a home.

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’s 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 borrowing power calculator (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.

When can I refinance 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 but you’ll need to meet more stringent lending criteria and will require LMI approval.

If you still don’t meet the criteria of conventional lenders, then you can apply for a loan with a non-conforming or specialist lender. Although this is usually cheaper than vendor finance, it’s still more expensive than a mortgage from a bank.

Don’t 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.

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.

If you’re able to refinance quickly then the investor may be able to offer you more favourable terms.

Do I need 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 don’t 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’re legally binding contracts.

We’ve 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’ve written above so please take the time to understand your agreement fully before deciding if it’s for you.

You must also be aware that if you miss several payments with a vendor finance instalment plan or rent to buy scheme, you may lose the deposit you’ve paid and the right to purchase the property.

Private investors don’t often have the financial means to hold onto a property if you’re not making your repayments. For this reason, they’ll be less lenient with you than a bank would if you missed payments on a mortgage.

  • Mackinley

    Hi, I can’t get a mortgage right now but I know that I can get one in a few years time. My friend told me that I should consider vendor finance but I’m not sure what to do. Thoughts?

  • Hello Mackinley,

    Rent to own / rent to buy is one form of vendor finance 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 generally ideal for people who’ll qualify for a bank loan in a few years time and would like to “lock in” their dream home now so it’s something you can consider.

    If you’re unsure or you want to discuss things directly, you can simply call 1300 889 743 and speak with one of our expert vendor finance specialists.

  • Jamison

    The risks and higher costs to vendor finance has put me off against going for it. I considered this because I actually wanted a no credit check home loan. Isn’t any lender offering this?

  • Hey Jamison,

    All lenders do a credit check on every home loan application so you won’t be able to avoid a credit check and still get a home loan. If you’re worried about getting a credit check because of bad credit record, there’s good news. There are other options available if you have a less than perfect credit record. You can check out the no credit check home loans page to find out what other alternatives are available:

  • madison12

    Aside from this, I think the only no deposit option I have available is using equity but I’ve got no idea how much I have and how much I need. Any help with this?

  • Hi madison12, yes, if you have sufficient equity then you can use it as a deposit so you don’t need any savings at all. We can value your property for free right now so simply give us a call on 1300 889 743 and we’ll let you know if you qualify.

  • Luke White

    Hi I need some advice. My wife and I are looking to buy a block of land in Qld for $265,000 and build a house on it for roughly $290,000. My father was going to help us out with the deposit using his super but can’t access it yet as he’s only 63 and still working. He needs to be 65. I’m potentially looking to get creative with the developer of the land. If I were to offer say, $275,000 for the land if the developer were to deposit finance say, $30,000 with a balloon payment before 4 years. That way I’d have $30,000 non-genuine savings (developer financed) and the developer would actually get a little more for the land (and raise the prices of subsequent blocks in future stages). Do you know of a bank that would consider a construction loan on this basis? Thanks in advance. Luke

  • Hi Luke,
    Yes this is possible depending on how good a negotiator you are. Also be aware the bank may reduce the value of the land due to the vendor finance. They use comparable sales and may not agree with the price.
    Overall the best option is a guarantor loan if this is possible

  • Luke White

    Thank you for getting back to me so promptly. Unfortunately neither of my parents own their own homes. My grandmother could possibly help with a guarantor loan for the deposit but I would prefer not to ask. I figured a deal like that could be win-win providing the bank agree to the valuation. Do you have any idea how much the bank may reduce they value of the land due to the vendor deposit finance option? How long is a piece of string I suppose. I appreciate your assistance. Luke.

  • They tend to reduce it back to fair market value. So typically $265,000 in your case.

  • amazon196969

    I have a property in WA I am considering to offer with rent to buy, VF
    or a gifted deposit. Wondering where I would find the best information
    for doing the rent to buy or VF deal?? The property is a duplex pair on
    one title so I have numerous questions in relation to the rental of the
    other unit or both ie where I would stand with tenants contract etc
    should the sales deal go pear shaped. Also would like an idea on how to
    estimate a price on the property with the rent to buy/VF options and
    what percentage for a deposit and term of contract etc.

  • If the seller isnt offering vendor finance then you need to obtain a gifted deposit or a guarantor loan.

  • amazon196969

    My apologies, I am the seller… just looking for information at this stage…thank you…

  • Sorry I misunderstood. Sorry not sure where you can get some info about it. I think there are some courses about it such as rick otton.

  • Bacon1

    I’m thinking of getting a mortgage but due to my bad credit history, it’s not possible at the moment. So, one of my friends suggested me to try vendor finance, and it could possibly be an option for me but he was saying to be cautious as well. Can you tell me about the pitfalls of vendor finance?

  • Hi Bacon1, vendor finance or rent to buy is not for everyone. The interest rates are higher and you have to pay more to buy a property. Also, the vendor holds the upper hand in the negotiations. It can be an option for you if you don’t have a good credit history, however, there may be other ways to get you approved for a home loan. We are specialists in bad credit; you can refer to our bad credit page for more info.

  • Kris Hetherington

    hi ive got a good credit rating im self employed have earnings of 69k so far this year i want to buy a place ive looked at for 430k best suggestion please

  • Hi Chris,
    As a minimum, you’ll require 5% of the purchase price as the deposit plus additional funds to complete the purchase such as stamp duty, legal fees etc. Most lenders also require you to be self-employed for at least 2 to 3 years, however, some lenders can consider people who’ve only been self-employed for only a year. If you don’t have your financials low doc home loans is also a viable option for self-employed borrowers. We would have to do a full assessment to find out if you qualify. Please fill in our online enquiry form: so one of our specialist mortgage brokers can get in touch with you to discuss your situation.