Most of us are familiar with the rent-to-own or rent-to-buy model when it comes to appliances, cars and other goods. But did you know there are also rent-to-own homes?

While this has proven popular overseas, rent-to-own is a relatively new concept for Australian homebuyers. So let’s explore what rent to own actually is, the pros and cons and what the process involves.

What is rent-to-own?

Rent to own homes is a process that allows you to rent your home with the option to purchase it at the end of a specified period. The purchase price is typically agreed upon before the start of the rental period.

As we know, home ownership is proving difficult for many Australians in the current climate. Saving enough for a deposit is one of the biggest hurdles faced by aspiring first-time homebuyers.

Rent-to-own offers an alternative pathway. It removes the requirement of saving a full deposit. Instead, you will contribute towards your deposit and the equity in the home over the lease period. And because the property should also increase in value over time, this equity will act as the loan deposit at the end of the lease period, when you apply for a mortgage.

There are a lot of benefits to this type of home purchase – but there are some downsides as well.

Benefits

• Those who are unable to save for a traditional home deposit will appreciate this alternative option.
• The rent-to-own home model delays the need to secure a loan. This gives you more time to improve your chances. You may want to pay off debts, improve your credit score, save more money and more.
• The money you pay in rent can go towards your ultimate purchase price, which means your rental money works for you!
• Locking in a future purchase price will be fantastic if the property gains value.
• This model is convenient if you want to lock in a property you love, but are unable to commit to purchase immediately.
• It enables the homebuyer to live in the house and ensure it meets their needs, before they purchase. You can choose not to buy the property if necessary.

Drawbacks

• The homebuyer will have to pay fees and charges. If the purchase of the property falls through, this money – along with equity accrued – will be lost.
• Locking in the future purchase price of the property may be a disadvantage if your property loses value over the lease period.
• If the property does lose value, this will also work against you when trying to secure finance from a lender. Financial institutions don’t like to lend money for an overpriced property.
• If the homebuyer cannot secure finance, the entire deal falls through.
• There is no transfer of ownership until the very final payment. This means that despite the extra fees paid, you will own no share of the property during the lease period. It also means that if anything goes wrong, you could be out your entire earned equity.
• The rent paid during the lease period is usually higher than the market rate, as a portion of this will go towards the final purchase of the home.
• Your potential pool of properties will likely be significantly smaller.

The rent-to-own process

There is a lot of controversy surrounding rent-to-own home schemes in Australia. And the rent-to-own home model can be considered risky. Some experts are concerned that first-time buyers can easily be taken advantage of. While others argue this type of home buying initiative offers a much-needed foot in the door for cash-strapped borrowers.

If you’re keen to explore the rent to own home process, read on!

First, make sure rent-to-own is right for you

A borrower should be confident they can afford the higher rental payments and will be able to secure a home loan. If the purchase goes ahead, rent-to-buy can be a great way to achieve home ownership. But if the purchase falls through, it can mean significant money wasted.

Research the local market to gain a better understanding of what might happen over the agreed leasing period. Is your property more likely to gain or lose value?

You will need to be fully accepting of the risks before you go ahead with this type of arrangement.

Second, find a suitable property

The rent to buy process for homes is still only available in certain areas and through specialist providers. The scheme operates differently across various states and territories, so get in touch with our team if you want to know about the options in your area!

Once you know if the scheme is available in the area you’re interested in, work with trusted real estate agents or engage authorised rent-to-own providers to find the right home for you.

Third, seek expert advice

It’s important you weigh up how the pros and cons of the rent to buy scheme will apply to your personal situation. While it might be a great option for some families, it could be unwise for others.

We recommend engaging financial, legal and mortgage experts (that’s us!) to review your circumstances and offer their professional advice. They may also be able to guide you through the process.

Fourth, sign the contract

You will need to discuss all of the terms with the property owner or rent-to-own home provider. Make sure you understand how much rent will need to be paid, how much will contribute to your equity, all fees and charges involved, the length of the lease period and the final purchase price.

You should also check who is responsible for maintenance issues. Rent-to-buy models often put the onus for keeping things up to par on the tenant.

Fifth, rent the property

Once all parties have agreed to the contract, you will pay your rent as normal and live in the property. You will have all the same rental rights as a normal tenant, with the added benefit of building up equity while you rent.

Sixth, purchase the property

Once the rental period comes to an end, you will have the option to buy. If you choose to go ahead with the purchase, you will have to apply for a home loan at this stage. You will be able to use your equity in the property as a deposit.

Once your home loan is approved, ownership will be transferred to you – congratulations! At this stage you simply continue to pay off your home loan as normal.

If you choose not to purchase the property or cannot secure a loan, the agreement will come to an end and you will not own the property.

Ready to explore rent to own homes?

Get in touch with our team – we’re on hand and ready to help!