As residential house prices soar across Australia, rent-to-buy schemes provide an alternative entry to the property market—no 20% deposit or large upfront costs necessary. Many would-be homeowners work hard and save diligently, only for property prices to increase, lowering their buying power.
Rent-to-own buying schemes are here to fix that. But since it's a new concept to Australian shores, we understand you'll have many questions. That's why this guide will answer essential questions like what rent to own is and how it works.
Let's start with what rent-to-own is.
How Does Rent to Buy Property Work?
As residential house prices soar across Australia, rent-to-buy schemes provide an alternative entry to the property market—no 20% deposit or enormous upfront costs are necessary. What do home buyers need to watch out for? We'll cover it in this guide.
What is rent to own?
Rent to own (sometimes called rent to buy) is a pathway to homeownership where an aspiring homeowner rents a property from a property owner, with a portion of that rent building equity or ownership in that property. Rent to own is best suited to home buyers who can comfortably afford to rent and save but still need the down payment to access a mortgage.
How does rent-to-own work?
Rent-to-own schemes have two components: a standard rental agreement and an option to buy.
With rent-to-own, the company owns the property outright, with the customer buying it back over time. The customer uses their rent payments to build equity in the property. Rent payments are usually above market rent as they include an additional cost towards the equity.
The equity is in the form of an 'option', which gives them the exclusive right, but not the obligation, to buy the property back in future. This option forms the basis of their deposit.
The service is usually governed by a rent-to-own contract which will include.
- An exercise period: how long a renter has the exclusive right to buy the property. This can be anywhere from 2 to 10 years.
- Option fee or security deposit: how much of your rent payments go towards building equity in your home.
- The purchase price: the 'buy-back' price that the renter pays for their house will differ depending on when they buy the property. Typically, the company agrees with the renter on a percentage increase, e.g. each year, the house price grows at 2%.
- Rent and payment amount: Australian lease agreements are governed closely, so there will be a standard rental agreement which details rental payments.
- Responsibility: It'll clarify who's responsible for the maintenance and upkeep of the home.
Benefits of rent-to-own homes
There are some significant benefits of a rent-to-own scheme.
- Capture capital gains: This is the major benefit of rent to own. Suppose the agreed property price increases at an interest rate of 2%, but the home value on the property market grows at 5% each year. In that case, renters can build equity in the property without actually buying the property first. This can fast-track renters to a significant deposit.
- No 20% deposit is necessary: Building an initial deposit is the hardest part of buying a home. It takes considerable time, and rising property prices only worsen the situation. Rent to buy is a significantly smaller upfront cost.
- Choose any home: modern rent-to-own services give buyers the flexibility of almost any home, whether a terrace in Sydney or an apartment in Brisbane.
- Work with professional buyers: first home buyers can get significant insight from working with a company specialising in property buying. These companies tend to know the ins and outs of the market and consider market trends, independent valuations, comparable properties and more to help you get on the property ladder.
- No obligation to purchase your home: rent to own can offer increased flexibility. If you decide not to buy the property at the end of your lease-purchase agreement, it's possible to waive your buying rights.
- Avoid extra homeownership costs: Depending on the company you choose, you may not need to cover the additional costs of homeownership, such as strata fees, property taxes, insurance, repairs and more.
- An edge during bidding: Most companies who operate in the space buy rent-to-own homes with cash, so you don't have to rely on a lender. Plus, buying in cash may help secure a discount on the original sale price, meaning lower rent payments.
- Lock-in a future purchase price: Some rent-to-own companies provide a set property value increase each year. This number is often just a few per cent, and you can purchase the property at the agreed price—so if the Australian property market rises quickly, your purchase price is locked in.
- You can renovate: another great way to grow value in your home!
What to watch out for
With a rent-to-own scheme, it's important to know what to consider when entering the contract.
- Capturing capital gains replies on the growth in the property market. While the 30-year average growth rate across Australia is 5.4%p.a. according to CoreLogic, the growth in property prices is not guaranteed. If, in an unprecedented scenario, the home value grew at the same rate as your buy-back price; you wouldn't benefit from capital gains.
- Your buy-back price could be more than the property market values the home at in a declining property market. You could choose to walk away from the home purchase, but you may forfeit your equity in the home.
- Your rent will likely be higher than renting without a rent-to-buy scheme. This is because you get additional benefits from potential home ownership. But it's a factor worth considering.
- Not all rent-to-own companies are made the same. It's important to research each company you're considering to discover the customer experience and what happens in the event of a default, hardship or if the company 'goes under'.
Frequently asked questions
How do I apply for rent-to-own in Australia?
The rent-to-own process will differ depending on who you use, but many providers have some similarities.
- Online application: Like a bank, the provider will assess your credit score, income and liabilities. This will give you a buying power, similar to a mortgage.
- Choose your home: Whether that's a home on the market or a new development.
- The purchase process: You may be required to cover stamp duty, real estate agent fees and insurance. You will likely make an initial payment as part of the rent-to-own agreement. You'll also likely need to sign a lease-option agreement or a rental agreement.
- Living in your property: You can move in and make it home. During your rental period, your monthly payments will cover both your rent (which may or may not be at market rent rates) and a contribution towards your equity in the property.
- Buy your property: During the rental period, as stated in your contract, you can exercise your right to buy the property at the agreed price. You have until the end of the rental period to make this choice.
Can I choose my own home?
For the most part, rent to own is flexible enough to support a home purchase of any kind. But some mortgage lenders have restrictions on the homes they'll lend on, so some restrictions still apply.
- Studio, off-plan purchases and one-bedroom apartments often aren't eligible.
- Land-only packages or knock-down rebuilds are often restricted too.
- Most homes you choose need to have a minimum area of 50 m2. There may also be an acreage limit.
What is the cost of rent to own?
Rent to own costs you much less upfront than a typical real estate mortgage.
Rather than the traditional 20% (or more in certain situations), you'll only have to part with a few per cent of the purchase price. Afterwards, you'll have fortnightly repayments—like you would if you were renting—except part of it goes towards savings that you can use as a future deposit.
The service is able to remain affordable because the company typically shares in the capital gains appreciation.
Who is rent-to-own suitable for?
Before entering into any agreement, it's important to consider your options and access independent legal advice.
- A credit score of at least 600. Rent-to-own will still likely require you to access a home loan at the end of your contract. If you have bad credit or poor credit history, you may find it difficult to access a home loan.
- A steady income, whether self-employed or working for a company.
- People who want to buy property in metro regions on the east coast of Australia. Many rent-to-own providers are unable to operate across Victoria.