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