Find out more about how RTB schemes work and compare your home buying options with Savvy.
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Home seekers often face several hurdles when it comes to achieving the Australian dream of buying their own home. Rent-to-own agreements are seen as an alternative way of entering the property market. It’s important to ask, though, how rent-to-own agreements work, what the costs are and what protections you’re afforded during your time as a tenant. Find out more about how this alternative home buyer scheme works with Savvy.
Rent-to-buy (RTB) schemes, or rent-to-own (RTO), allow would-be homebuyers the option to purchase a property they rent at the end of their lease agreement. These schemes are targeted towards:
Once a buyer finds a property they like and a rent-to-buy program, they enter into a lease agreement and rent on the property. After between three to five years, the tenant will be able to apply for a home loan to purchase the property. The rent they’ve paid is used as home equity and is deducted from the purchase price of the property agreed upon at the start of the agreement.
If the loan is approved, the title for the property is transferred into the tenant’s name. However, it’s important to understand the risks of rent-to-buy schemes. They’ve been banned by some states due to the high risk to purchasers. The Consumer Action Law Centre, in a 2016 report, said it had seen “no examples of successful rent-to-buy deals” and described the practice as “extremely risky financially and the legal protections for buyers are grossly inadequate.”
Renting to buy a house offers very little legal protection if something does go wrong, so it’s important to consider your rights. It’s vital to read through every contract carefully and be across all the expected fees and terms before you sign up.
It's also crucial to consider what you stand to lose with very few rights as a tenant if something does go wrong. For instance, if your home loan application is unsuccessful, you risk losing the money you’ve invested and the property. If the property developer or landlord miss their own mortgage payments, creditors could seize the house and leave you homeless and out of pocket.
After a prospective home buyer enters a rent-to-buy scheme, there are several upfront and ongoing costs involved:
Non-refundable deposit
Opting into one of these schemes still requires a deposit to be paid upfront, which home seekers may secure through the First Home Owners Grant (FHOG) if they are eligible to receive it. The deposit is usually substantially lower than what banks would require for a home loan deposit.
Option-to-buy fee
An option-to-buy fee is a charge which enables you the option to buy the property at the end of the lease. This fee is usually 1% to 5% of the sale amount.
Rent costs
During the lease period, the buyer pays above market value rent. This can be 50% to 100% more than the market value. This goes toward the purchase price of the property. Participants will also have to pay a rental bond upfront, which is usually one month’s worth of rent.
Rent-to-buy options make it easier for people (such as first home buyers) unable to obtain a regular home loan due to low income or a bad credit rating, but there are alternatives to entering into this style of arrangement:
Low deposit home loans
These home loans allow you to borrow up to 95% of a property’s value, with some lenders offering deposits of as little as 5% (with a requirement to pay Lenders Mortgage Insurance (LMI) in most cases). Opting for a low-deposit home loan instead of an RTB agreement is the much safer legal avenue to take when it comes to owning a home.
You can also take advantage of interest-only periods, low introductory rates and low- or no-fee offers to help make your repayments more manageable initially. While they may be more difficult to get approved for, you can compare a range of low deposit home loan offers with Savvy to find the best one for you.
Government grants
The federal government has a number of schemes available to help would-be buyers secure their first home. One program the government offers eligible buyers is the First Home Loan Deposit Scheme. Under this scheme, you’ll only have to contribute as little as a 5% deposit without having to pay LMI. The government guarantees up to 15 per cent of the deposit. You may also take advantage of the FHOG to help you pay for your deposit, with available amounts up to $15,000 depending on where you live.
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Opting into a rent-to-buy agreement will lock in a sale price for the property.
Rent-to-buy arrangements allow tenants to rent a property they may like to buy down the track. It also delays the need for a home loan until the end of the lease.
Your weekly rent payments may be increased by between 50% and 100%.
It’s important to read through all the documents with a lawyer to untangle any confusing terms and conditions surrounding ownership of the property and what happens to your money.
You have no legal claim to the property until you have purchased in full, including securing a loan. If you miss one rent payment, you risk losing the property and anything you have paid out.
If the cost of the property is out of reach, you risk having your home loan denied, losing the property and the money you have invested.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
