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Rent-to-Buy Houses

Find out more about how RTB schemes work and compare your home buying options with Savvy.

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, updated on August 7th, 2023       

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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.

How does a rent-to-buy scheme work?

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:

  • First home buyers who are eager to enter the property market but don’t yet have money for a 20% deposit.
  • Low-income earners who want to own their own home but don’t fit the conventional eligibility criteria.
  • A prospective buyer without the credit history needed to get a mortgage.

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.

What are the costs?

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.

What are my other options for buying a home aside from a rent-to-buy agreement?

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.

The pros and cons of rent-to-buy schemes

PROS

Protection from rising house prices 

Opting into a rent-to-buy agreement will lock in a sale price for the property.

Easy way to enter the property market

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.

CONS

Higher rent payments

Your weekly rent payments may be increased by between 50% and 100%.

Potentially confusing contract terms

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.

No protection for what you’ve invested

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.

Final purchasing price may be out of reach

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.

Frequently asked rent-to-buy questions

What paperwork and documentation are involved?

Rent-to-buy providers will ask for the standard documentation that you would normally provide when applying to rent a property such as payslips, rental history and financial statements. You will also need to supply proof of identification through a driver’s license or a current passport.

Can I refinance my RTB property down the track?

It is virtually impossible to refinance your rent-to-buy property if you haven’t been approved for a standard home loan.

What rights do I have to the property while I’m renting to buy a house?

You have no ownership rights on your rent-to-buy property until you’ve made your last payment and are approved for a home loan. If you default on your rent at any time, you could lose the money you have already paid. If the vendor doesn’t keep up with their own mortgage payments, and their lender repossess the property, the would-be buyer also loses all rights to the home.

Which states allow rent-to-buy agreements?

Most Australian states and territories offer rent-to-buy schemes; however, the practice has been outlawed in Victoria. In South Australia, the South Australian Housing Authority is the only body allowed to offer the schemes.

Are you better off saving up for a regular home loan?

Yes – although rent-to-buy schemes provide an initially cheap and easy way of entering the property market, the arrangement leaves little protection for the prospective buyer and could prove costly if the deal falls through. You can compare home loan offers with Savvy.

Can I apply for a low documentation home loan instead of an RTB?

You can’t – lower documents mean higher risk. These types of loans are designed for contractors or freelancers, who often can’t produce pay slips or financial statements such as tax returns when applying for a home loan. In these cases, lenders require larger deposits which are generally unaffordable.

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