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rent to buy houses
How Rent-to-Buy Schemes Work: Owning a House in Australia

August 02, 2021

The increasing prices of goods and services and the stagnant wage rate are not the tandem we’d like to achieve in today’s time. The pandemic has even made this harder as the implementation of lockdowns affects businesses and employees, raising the number of unemployed workers around the world.
 
Due to this, people are confronted with physiological problems on food and shelter, in the absence of an income source. On top of the expensive food, they’re also facing an increase in house prices, which makes it harder for many Australians to achieve home ownership.
 
Fortunately, there is an alternative way for those who’d like to own a house without exhausting all their sweat and blood for a house deposit. With rent to buy scheme, you can stay within your budget while making your dream home a reality. In this article, we'll discuss how rent-to-buy schemes work in South Australia.
 
Without further ado, let’s get started.
 

What is rent-to-buy?

Rent-to-buy schemes, also known as rent-to-own, where a leasing agreement/s gives the tenant the right to purchase a house at the end of an agreed rental term, given the exact price of the property, prior to signing the contract. This scheme eliminates the need to deposit a specific amount of money, or funding from a bank or other financial institutions. 
 

Advantage and Disadvantage of the rent-to-buy scheme

Aside from the fact that the rent-to-buy schemes provide a quicker option to get your dream home, this also enables you to rightfully buy a house on the market at a lower purchase price just in case the property’s value increases in the future. This is on the one hand.
 
On the other hand, the scheme to obtain a rent-to-buy house may also work against the buyer, vice-versa. If, in any case, the purchase price of the property becomes cheaper in the future, the tenant's payment would still be the same as stated in the agreement. Moreover, the house won’t be theirs until the last payment is made.
 
The major downside to rent-to-buy schemes is that participants don’t own any part of the home until they’ve made the final payment. That, and the fact they still need to apply for a home loan when the time comes for them to buy the property at the end of the rental agreement. 
 

How does rent to buy work?

The schemes have 2 components - (1) a standard rental agreement/lease option, and (2) an option to buy. For those who wish to buy a house through rent-to-buy schemes, a contract will be made giving the aspiring homeowner the right to purchase the property after the end of the predetermined term. This term may last from 2 to 5 years. 
 
If you’re asking, “Do I only get to pay the actual rent?” the answer will be NO. During the rental period, aside from the rent which also is above the market average, the tenant also needs to pay a fee for the option to buy the property by the end of the agreement. In some cases, contracts also cover additional payments to cover fees for building maintenance, stamp duty, and/or insurance. By the end of the agreement, the total amount of money the tenant paid for the “option to buy” the house will be deducted from the purchase price of the property.
 

How can I apply for rent-to-buy schemes?

If you think this scheme is what you’re looking for, here are the steps to start the process:
 

Finding a property

The number of properties covered by the rent-to-buy schemes is limited in the market. This makes the process a little bit longer than the traditional search for a house to buy. On top of this, an additional step must be taken after finding the right (available) one. Refer to step 2.
 

Research about the property

Hooray! So you’ve found one. The next step is to go deeper. A house is a good investment, and it’s pricey so make the most out of your hard-earned money or an option fee, but you might want to consider home loans. Look at the neighborhood -- does it support your lifestyle? Is it accessible? Does its purchase price justify its state?
 

Research about the seller

Once you’re done digging through the property details, it’s also an essential step to look into the seller’s background. If possible, probe why they decided to sell their property under such a scheme. and check the title of the property. This step will save you from possible unfortunate circumstances just in case the seller faces financial difficulties in the future and defaults on their mortgage. This may leave you broke and homeless when not taken care of sooner. 
 

Seek a legal advice

Things can get highly technical when you indulge in these types of schemes. So before signing any agreement, it is best to consult an expert so you won’t get yourself into trouble. You may ask for the assistance of an independent solicitor in drafting the contract especially in the areas of additional rent and home equity. If you’re a tradesman, you may consider asking the seller whether the possibility of rent reduction can occur if house improvements are done.
 

 Never miss a payment!

Once the papers have been signed, the success of these schemes is in your hands. Coming up with a monthly budget will be a great idea. Sticking onto a monthly budget would keep you on track with your priorities. 
 

Get a home loan

After the rental term, you need to make payment for the property to finally get that title. Secure a home loan so get enough money to pay for the property.
 
Once all these steps were taken,  you can now live in your first home and savor the feeling of becoming a certified homeowner! The years of renting and sticking into a budget are over! 
 

Considerations before entering a rent-to-buy scheme

Before getting into the contract signing of any rent to buy scheme, it's important to consider getting legal and/or financial advice from experts.
 
Though RTBs can be beneficial, they also can impose potential risks and significant costs to buyers. To help you with the decision-making, here are some questions you need to ask yourself before entering a rent-to-buy scheme:
 
  • Will I be able to pay a higher rent, additional fees for the option to buy, and other costs such as insurance, maintenance, etc.? If in any case, you weren't able to pay, what will happen to the property at the end? What about the payments you previously made?
  • Is there a money-back guarantee if you choose not to proceed with buying the property as part of the scheme?
  • On the other hand, if you decide to go ahead with the purchase, is a home loan secured at the end of the rent to buy agreement?
 

Alternatives to rent-to-buy schemes

Rent-to-buy schemes may be a better option for those who can't get bank or lending approvals from their respective institutions for a home loan due to certain reasons. However, for those who aren't in this position, RTB schemes are obviously not the only option to consider to buy the property you want.
 
Other types of home loans include a low deposit, low doc, or bad credit home loan which you may take into consideration. However, like any other scheme, these traditional mortgage solutions have potential downsides so research your options properly.
 
If you feel the previous options aren't what you're looking for, look into a shared equity platform (SEP) where commonly 5% is given to tenants after a 5-year stay as a form of leasing incentive. Unlike RTBs, SEPs will only require a potential buyer to pay the normal market rent and receive fractional interest in the property they're renting. This percentage grows each year as they stay as tenants of the property. At the end of the SEP agreement, the renter is given a choice to sell their interest and use the money for their deposit.
 
If SEP doesn't suit your preference, another option is to wait a few years to save up the deposit needed to take out a more traditional home loan. First Home Owners Grants and the First Home Loan Deposit Schemes may also help you purchase your dream property.
 

Talk to a real estate agent

The challenges in the process of owning a home differ from person to person. If traditional methods are still your preference, talking to a real estate professional is your first step towards that goal. For more information contact A-List Property Group at 0413 690 459 or email us at anthony@alistpropertygroup.com.au. 
 
 
 

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