Rent to buy schemes

Find out all there is to know about rent to buy schemes in Australia, and why it may be best to avoid them.

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renttobuyA rent to buy scheme involves a contract that lets you own the home you rent at the end of a given time period, also called a wrapping or a lease-option scheme. You pay rent for the home you wish to buy for a set time period, and at the end of the contract's term, you have the pay the remaining amount.

While this might seem all well and good at the onset, know that many people have ended up losing their homes, as well as the rent money they put down, as part of the scheme. In fact, a 2016 study by the Consumer Action Law Centre couldn't identify a single successful case of a rent to buy scheme. In the past some unscrupulous sellers have used this type of agreement to scam buyers, so before taking part in a rent to buy scheme, ensure that you contact the office of fair trading for your state, as well as an expert such as a financial planner or solicitor.

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. Buying a home using a home loan may be a better alternative, considering the risks of such a scheme. A rent to buy agreement may be best suited for people who don't qualify for home loans.

How these schemes work

Certain property developers across Australia give buyers the opportunity to own homes through such schemes. The number of houses on offer through these schemes are much lower than houses offered through regular sale, given that not many people who are selling homes want to take this route. This limits your choices considerably.

Once you find a home you want to purchase through a rent to buy scheme, you sign a contract. You then follow this up by making regular rent payments, normally for between four and five years, at the end of which you have the option to buy the home.

Rent in these schemes is typically higher than the average rent in the market. For example, if the market rent for a home is $400, you might expect to pay $600 to $800 as rent for the same through such a scheme. You might also have to pay a premium in lieu of the potential purchase. In many cases, the purchase price later charged when you’re ready to buy can also be higher.

Pros and cons of rent to buy schemes

Pros

  • One advantage when choosing to go with one of these schemes is that you don't have to worry about getting a home loan at the early stage, and your rent goes towards building some kind of equity

Cons

  • However, you'll be paying higher than average rent, and you might stand to forfeit your deposit and rent payments if the deal doesn't go through as planned.
  • You'll still usually require some kind of finance to make the final payment on your property, and how you get this finance is not a part of the deal. Unlike buying a home through a mortgage, this path does not offer you any safeguards other than what falls under tenancy laws. Missing a single payment can cause the sale contract to be terminated.

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 deposit reasons. 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, establish how much of the rent that you pay actually goes towards the value of the property. This is because there have been cases where only the excess rent paid goes towards building equity in the home. The Supreme Court of Australia has in the past ruled at least one rent to buy scheme in WA as illegal, owing to the fact that its promoters misled consumers and were not licensed real estate agents.

Going through the fine print of any such scheme is crucial before you sign the dotted line, and seeking legal advice is in your best interest. Many property experts and government bodies urge homebuyers to stay away from these schemes, so it’s crucial to seek expert opinion.

With a number of rent to buy scheme promoters coming under the hammer, it's best that you follow due diligence when opting for any such scheme. Know exactly what you're getting into at the onset, failing which it might mean facing financial problems down the line.

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