Vendor Finance

Find out how vendor finance to purchase a home really works, and whether it could be a viable alternative for you, with Savvy.

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, updated on August 7th, 2023       

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Vendor finance can assist renters (or those with a bad credit rating) to get onto the property ladder in a climate where steeply rising house prices have made it difficult for first homeowners.  Find out more about vendor finance and how it works with Savvy and compare a range of home loans to help you make an informed choice on which is best for you.

What is vendor finance?

Vendor finance describes an arrangement whereby the owner of a property loans money to another party who wishes to purchase that property.  It’s a private sale agreement between two parties that doesn’t directly involve a bank or lender in the purchase agreement. 

Rent-to-buy schemes are a form of vendor finance whereby a person who is renting a property agrees to buy the property for a set figure and pays for it over time with increased rent payments.  The additional rent paid goes towards paying off the cost of purchasing the property and eventually the original property owner transfers the Certificate of Title to the renter, who takes ownership of the house. 

Sometimes, the renter will pay a ‘bond’ to secure an option to purchase the property and will pay rent until their financial situation improves and they’re able to get a traditional home loan.  Another form of vendor finance involves the seller assisting the buyer by providing the deposit to enable the buyer to get a conventional home loan, known as financed deposits.

What are the advantages and risks of vendor finance?

The advantage to the purchaser of such an arrangement is that they don’t need to approach a bank or traditional lender to get a home loan approved.  This can mean the difference between being able to buy a property and forever staying in the rental market.  This is particularly relevant if the potential purchaser has a poor credit history, an unreliable income source or a low income, and would find it difficult to get a traditional loan as a result.

The seller of the property continues to benefit from rental income without the stresses of tenant turnover or the risk of getting bad tenants who cause damage to the property.  At the same time, the seller can sell their property over time (sometimes at a highly inflated price) without having to put it on the market or declare capital gains tax in a lump sum.  There can be additional tax advantages involved in a rent-to-buy or vendor purchase scheme for a property owner (if the home being sold is an investment property).

However, vendor finance home loans come with very serious risks.  Such agreements gained popularity in Australia after the introduction of the First Home Owners Grant in 1998, but have since gained a bad reputation due to their lack of regulation.  These agreements are often highly complex and can cause confusion and disagreement over the ownership model of the property, as well as leaving buyers at a loss when selling due to the inflated price they’ve gradually paid.

Extreme caution is needed if you’re considering a vendor loan, and you should never enter into such an arrangement without seeking independent financial advice from a trusted source (not a lawyer or conveyancer connected with the vendor finance scheme).  It’s absolutely essential to seek independent legal advice if you’re considering a vendor finance loan arrangement.  A report from the Consumer Action Law Centre in Victoria in 2016 stated that “these deals typically do not result in successful home ownership and in some cases financially destroyed hopeful buyers.”

What alternatives do I have if I’ve been turned down for a traditional home loan?

If you have been unsuccessful in gaining approval for your first home loan, your options are:

  • go to a mortgage broker who can give you advice about online lenders who specialise in lending to people with a poor credit rating
  • investigate and compare options for applying with a specialist lender offering low-deposit home loans right here with Savvy
  • ask a parent or close family member to act as a guarantor for you, so you’re able to apply for a guarantor home loan
  • wait for some time before you apply for a home loan again and, in the meantime, work towards increasing your income
  • delay another home loan application until you have a larger deposit, preferably at least 20% of the value of the property you wish to purchase
  • work on improving your credit score by paying all your bills on time, cancelling any lines of credit you don’t need (such as department store ‘buy now pay later’ schemes), reducing the credit limit on your credit cards, cancelling any sports betting accounts you may have in your name, and paying off all outstanding debt

More of your frequently asked questions about vendor finance

Does vendor finance only apply to buying property?

No – vendor finance can be applied to vacant land, units and apartments, businesses or even commercial plant and equipment.  There is no limit to what can be bought using a vendor finance arrangement.  Such agreements are far more common in commercial and industrial settings, with the purchase of major industrial equipment and machinery commonly undertaken with a form of vendor finance involved (which is also called supplier financing, supply chain finance or trade credit).

Are ‘wrap-around loans’ the same as vendor finance?

Yes – they’re a form of vendor finance whereby the seller of the property takes out a mortgage with a traditional lender, but the purchaser pays the mortgage repayments on that loan (in addition to rent) in return for the promise of future ownership of the home in question.  They’re called ‘wrap-around loans’ because the agreement between buyer and seller is wrapped around the mortgage on the property.

Is vendor finance always more expensive than a traditional loan?

Yes – vendor finance is almost always more expensive than a traditional home loan, and vendor finance contracts for home purchases are typically complex legal documents which make it difficult to work out the actual long-term cost of the loan involved.  There tends to be little transparency in vendor finance contracts, and very little chance to compare loan offers to ensure you’re getting a good deal.  Savvy helps you compare home loans side-by-side clearly and factually so you have the knowledge to make sound financial decisions with our reputable lender panel.

Is it possible to revert to a traditional bank loan after a period of vendor finance?

It is a very difficult proposition to approach a lender asking for a home loan after a period of using a vendor loan as your source of finance.  If you have a stable income and your credit rating is good, you may find a lender prepared to offer you a loan after a period of vendor finance, but your financial situation would have to be exceptional for most lenders to approve your loan application.  However, some online lenders specialise in offering loans to people with poor credit ratings.

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