If you can comfortably manage your rent payments, you may feel you could manage the repayments on a mortgage just as easily. However, many Australian renters have had their home ownership dreams frustrated by the challenge of saving a deposit on a home loan. Rent-to-own programs could theoretically offer an alternative route to home ownership, but are they worth the risk?
What is rent-to-own and how does it work?
Rent-to-own and rent to buy programs exist in the Australian property market, however they aren’t as common as more traditional home loans. These programs may be offered by specialist financers, or by property developers.
While the exact terms and conditions vary, many rent-to-own programs work like this:
- You find a property that you want to buy, and perform your due diligence.
- The rent-to-own provider buys the property (unless they already own it, such as if they’re the developer), and you start renting it from them. You may need to pay a deposit at this stage.
- You pay the financier a predetermined amount of rent each month, a percentage of which may go towards buying the property in the future.
- After a certain length of time has passed (often three to five years), you have the option to take out a traditional mortgage from another lender and buy the property from the rent-to-own provider.
Both your rental amount and final property purchase price are often determined at the start of the arrangement, so you should know exactly what you’re getting into from the start.
Is rent-to-own safe?
Rent-to-own programs in Australia are often considered riskier than traditional home loans. In 2016, a report from the Consumer Action Law Centre found no successful examples of rent to buy deals, adding that they are “extremely financially risky and the legal protections for buyers are grossly inadequate.”
Some of the risks involved with rent-to-own include
- You’re not the legal owner of the property
- Strict terms and conditions – missing a rent payment could mean forfeiting the house altogether, along with any money you’ve already paid
- Higher than average rents, fees and purchase prices
- Locked in for years – no easy option to refinance with a different lender
- Fewer finance providers and properties to choose from
Additionally, rent-to-own programs may not be available where you’re living. Some state governments have restricted or banned rent-to-own programs in the past.
How does rent-to-own compare to a standard mortgage?
One of the biggest differences between a rent-to-own program and a traditional mortgage is the upfront cost. While you’ll likely have to pay some fees and charges when you apply for a rent-to-own property, a home loan will require you to save up a deposit of at least 20 per cent of the property’s value, or pay a smaller deposit plus Lender’s Mortgage Insurance (LMI). Combined with other fees, charges, taxes and the like, a home loan is likely to have a much higher upfront cost than renting to own.
Additionally, if you have a bad credit history, a rent-to-own program may allow you to start making progress on buying a property while you’re improving your credit score. Of course, if you still have bad credit by the time the option to purchase rolls around, you may still struggle to find a home loan.
Of course, when you take out a mortgage on a property the title transfers to you – even though you’re paying a mortgage on the property, you remain the legal owner. This may not be the case when renting to own.
You may also have much more variety of choice available with home loans compared to renting to own. Mortgages are available from large and small banks, as well as mutual banks and online-only fintechs, so if you compare what’s out there you may find an option that suits your personal and financial circumstance. There are far fewer rent to buy providers in Australia (these include OwnHome and Assemble Futures), so you may not enjoy as much freedom of choice.
Finally, there are more regulations and legal protections surrounding the mortgage industry compared to the rent-to-own industry. While some of these rules and regulations may seem like they’re only there to make it harder to get a home loan, they can help protect your finances and prevent you from borrowing more than you can realistically afford to repay. The rent-to-own industry is less regulated, which could potentially leave you more vulnerable to financial difficulties.
Are there alternatives to rent-to-own?
If saving a deposit is what’s holding you back from applying for a mortgage, there are options available for follow through without opting for rent-to-own.
If your parents or other close relative owns their home, they may be able to secure your loan with the value of their equity as a guarantor.