Rent to buy schemes
Rent to buy home schemes are rare in Australia and are often considered to be risky for renters. But at least in Victoria, this may be changing.
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A rent to buy scheme, sometimes called rent to own, allows renters to buy the place they're renting at the end of a specified rental period. While renting, a portion of the rent you pay goes towards paying off the home, and you pay the rest at the end of the rental period.
In theory, a rent to buy agreement is good: You pay rent and slowly work your way towards buying a home. These schemes are rare in Australia and when they have been used, they've often hurt renters. Most state and territory governments do not have strong protections in place for buyers. In many cases, renters on low incomes find themselves paying above market rent and agreeing to a higher purchase price at a later date, and ultimately losing their deposits when they are unable to meet the costs.
There are signs that this may be changing, with legal reforms and new rent to buy projects operating in Victoria.
How rent to buy schemes usually work
Rent to buy schemes are not very common in Australia. In most of these schemes, a developer or a third party offers a home for sale with a rent to buy contract. The renter agrees to pay regular monthly rent, which is usually above market rate. For example, if the market rent for a home is $400, you might expect to pay $600–$800 as rent. You might also have to pay a premium in lieu of the potential purchase. In many cases, the purchase price charged later on when you're ready to buy can also be higher.
These higher rents contribute towards the final purchase of the property. The contract usually specifies a certain period after which the renter has the option to buy the home. In some rent to buy contracts, there is an agreed sale price for the home. In other cases, this price is determined when it's time to finalise the purchase.
Why many rent to buy schemes are risky
Rent to buy is an option that appeals to would-be buyers who can't afford to buy a home in the traditional way. But this often means rent to buy schemes attract customers who have less money and are more vulnerable to predatory vendors.
These schemes also operate in something of a legal grey area, with less buyer protections than traditional property transactions. It's important to know that there can be a number of catches with these schemes. Not only do you stand to lose the money you've already paid if you default any time during the course of the contract, you also have no ownership rights on the home until you've made the final payment.
A 2016 study by the Consumer Action Law Centre couldn't identify a single successful case of a rent to buy scheme. According to this report, risks of rent to buy schemes for buyers include:
- The contract is often unaffordable for the buyer and "destined to fail from the start"
- The buyer is not the legal owner of the property until the buyer ultimately pays the full purchase price and has their name on the title
- Buyers risk losing everything they've already paid if they miss a payment or if the vendor has debt problems of its own
Considering the risks, buying a home using a home loan may be a better alternative for a buyer who can afford it. A rent to buy agreement may be best suited for people who don't qualify for home loans.
But it's a different story in Victoria.
Rent to buy schemes in Victoria
In 2019 the Victorian government introduced a new law to prohibit some of the problems with predatory rent to buy contracts. This law was introduced to protect buyers in various circumstances.
According to Consumer Affairs Victoria the rule changes prohibit certain 'terms contracts' and rent to buy arrangements, with significant fines and potential jail time for vendors and third-party intermediaries to act as a strong deterrent.
This has since resulted in a few new entrants to the rent to buy market operating with a slightly different model.
Assemble Communities offers rent to buy units in several developments in Melbourne and Ballarat. According to the company's version of rent to buy, you agree on the rental price and purchase price upfront and then sign a lease. You can rent the home for 5 years before purchasing it, with the rental lease negotiated every 12 months.
Renters are not obligated to purchase the home when the time comes, but you can sign a contract of sale that gives you the option to buy. You don't have to pay any kind of upfront deposit while renting. The only money you pay is the rent and the bond, which is handled like a normal rental bond lodged with the Residential Tenancies Bond Authority. This is refunded if and when you end the lease.
This model is relatively new, and any buyer should always do their own research and get independent legal advice before signing a rent to buy contract. It's also very important to make sure the agreed-upon rents and future purchase price are reasonable compared to similar homes in the local property market.
Alternatives to rent to buy schemes
Rent to buy schemes provide a way for Australians to buy a home even if they can't obtain a regular home loan, whether that be due to income, bad credit or the hurdles of saving a deposit. Generally there are ways around this through different loan types. Look below to see what loans might suit different types of borrowers.
- I don't have a large enough deposit – There are low deposit home loans which exist to help borrowers with small deposits.
- I can't prove my income – Low doc home loans can help Australians who can't supply the usual range of documents to qualify for a home loan.
- I have bad credit – Some lenders offer bad credit home loans to those looking to buy a home.
What should you look out for when taking part in a rent to buy scheme?
When looking at rent to buy schemes, it's very important to get legal advice and check the details of the contract thoroughly. Here are some steps you can take to reduce your risks:
- Seek advice from a solicitor or conveyancer. Many property experts and government bodies urge homebuyers to stay away from these schemes, so it's crucial to seek expert opinion.
- Research the company or seller offering the rent to buy property. Read reviews online and check if there's any news about the company.
- Make sure the rent you are paying is reasonable compared to other similar rentals on the market. If you are paying more than the market average, make sure the contract specifies that this money is going to pay off the home.
- Ask what happens if you decide to back out of the home purchase. Will the extra rent you've paid just disappear?
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