Rent-to-own schemes are becoming an increasingly popular option for people chasing the great Australian dream of homeownership.
Read on to find out everything you need to know about these schemes, including:
- What are rent-to-own your own home schemes?
- How do rent-to-own schemes work?
- The pros and cons of rent-to-own your own home schemes.
- Why rent-to-own schemes are becoming more popular.
- The steps in the rent-to-own your own home process.
What are rent-to-own schemes?
A rent-to-own scheme is a rental property agreement with an option to buy the property at the end of your lease term. The future selling price is included in the agreement.
How do rent-to-own your own home schemes work?
There are two separate agreements in a rent-to-own scheme.
1) A standard property rental agreement.
The term of this agreement usually ranges from two to five years.
2) An 'option to buy' agreement.
Renters pay extra for this option to buy and may be charged for costs like property maintenance and insurance (which the owner pays in a standard rental agreement).
Renters usually also have to pay a deposit to secure the option to buy. Many first home buyers use the First Home Owner Grant for their deposit. This amount varies among Australian States and Territories and is usually deducted from the selling price when the right to buy is taken up.
The pros and cons of rent-to-own schemes
Rent-to-own schemes have their pros and cons. Let's look at the main advantages first.
Pros
- They can give you more time to get your home loan approval.
You can use the two to five-year term of your rental agreement to improve your credit score and increase your income.
Lenders will check your credit score when you apply for a home loan at the end of your lease. If you have a good credit score, you'll find it easier to get your loan approved (and vice versa).
You can improve your credit score by reducing your debt level and paying all your debts on time (including any loans or credit card debt that you have, as well as your mobile phone and electricity accounts).
- You can buy a home at 'today's price', rather than a future price.
This can be an advantage when market prices rise, and your agreed future price is a good deal in today's dollars.
- You can get a foot on the property ladder without coming up with a 20% deposit.
Many lenders will require you to come up with a 20% deposit before approving you for a home loan. With the median price of an Australian home now at over the $1 million mark, that means buyers can need a deposit of $200,000 or more.
A rent-to-own scheme can allow you to live in the property you want now without needing to come up with that amount.
Cons
On the flip side, rent-to-own schemes also have their disadvantages.
- You're still paying rent until you take up the option to buy.
As the old saying goes, "rent money is dead money". Every dollar you pay during your rental period isn't helping you pay off the home.
- You may not qualify for a home loan at the end of your lease.
If you don't, then you'll lose the extra money you've paid for your option to buy.
- Market prices may fall during the term of your rental lease.
If they do, you'll end up paying more than your property is worth at the end of your lease. Several analysts are tipping that property prices will fall over the next couple of years after the incredible boom over the past two years.
- Missing rental payments could void your option to buy.
It's crucial to check the terms and conditions of any rent-to-own agreement before you sign it. Ideally, have it checked by a solicitor. Some agreements contain terms that void your right to lease or buy if you make a late rental payment.
- Your name isn't on the title to the property until you exercise your right to buy.
This means that if the current owner (your landlord) has a mortgage on the property and fails to make repayments on time, their lender is legally entitled to repossess and sell the home (and not necessarily to you). Their rights trump your rights.
Why are rent-to-own your own homes schemes becoming more popular?
The primary reason rent-to-own schemes are becoming more popular in Australia is reduced housing affordability. Property price increases have far outstripped wages growth, and rising property prices also means:
- Higher deposits are required
- Higher repayments because buyers need to borrow more.
Rent-to-buy schemes are also a potential option if you currently have a bad credit score.
Steps in the renting-to-own process
There are several steps you should follow before entering into a rent-to-own scheme.
Step 1: Weigh up the pros and cons
Make sure you weigh up the pros and cons based on your specific situation, needs and goals.
Step 2: Find a suitable property
Find a suitable property that's being sold under a rent-to-buy scheme. Only a minority of sellers offer this option.
Step 3: Verify the seller's financial situation
As mentioned earlier, if your seller has a mortgage on the property, you have increased risk. If they do, you need to see evidence of their financial security.
Step 4: Get professional, independent advice
Get professional and independent legal and financial advice before signing your rent-to-own agreement. You must understand all of the terms and conditions.
Include a satisfactory building and pest inspection clause in the contract, just like you would for any other property.
Step 5: Make all your payments on time
Make sure you make all your rent and option payments on time for the entire term of your agreement. If you don't, you could not only be evicted as a tenant; you could also lose your option to buy.
Step 6: Get a home loan approval
As you approach the end of your lease, get a home loan approval to buy the property for the selling price outlined at the start of the agreement.
Your chances of approval will be better if you've used your rental agreement time to maintain or develop a good credit score.
Step 7: Buy the property
Use your right to buy option at the end of your lease.
The bottom line
Whether or not a rent-to-own your own home scheme is a suitable option for you depends on your individual needs and goals. You should always get professional advice from a solicitor before entering into a rent-to-buy contract.