How Does Rent-to-Own Work?

So you have heard about rent-to-own, but how does it work?

Guides
Home Ownership
by
Myles O'Brien

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 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. 

What is rent to own?

Rent to own (sometimes called rent to buy) is a financing option that allows aspiring homeowners to rent a property they plan to buy in the future. 

You enter into a purchase agreement with a company that'll assess your situation and tell you which homes you qualify for. After you make your choice, the company will take care of the buying process and set up a contract with the option to buy the property. 

Rent-to-own contracts last anywhere between two to ten years and will differ depending on the company you use. During this time, you'll be able to purchase your property by paying off any loans or using your savings as a downpayment. 

If your financial situation changes, you can choose to forgo your buying rights, which may be subject to extra fees. 

Benefits of rent-to-own homes

The most significant benefit of renting to own is that you can become a home buyer sooner. So you can have capital gains work for you rather than against you. 

On average, property prices across Australia's eight capital cities increased by 23.7% from December 2020 to December 2021. If you planned to buy a million-dollar home in 2020, your deposit would be about $200,000. But only a year later, you'd now need $240,000. 

So if you didn't have a large enough deposit at the end of 2020, you'd be further behind in 2021. 

You'd have to either:

  • Settle for another property
  • Extend your current rental agreement
  • Find a mortgage lender willing to accept a smaller deposit in exchange for a higher interest rate.
With rent to own, this situation is a thing of the past. 

Some other benefits include: 

  • Work with professional buyers: At OwnHome, our expertise is property. We know the ins and outs of the market, ensuring we purchase your home at a fair price. Our team considers market trends, independent valuations, comparable properties and more to help you get on the property ladder. 
  • No obligation to purchase your home: While you're welcome to buy your property during the contract, we won't force you to. We understand that situations change—especially after a few years. So it's possible to waive your buying rights. 
  • Avoid extra homeownership costs: Even if you pay for a home in cash, you'll still have many additional costs. These include strata fees, property taxes, insurance, repairs and more. With rent to own, you won't have to worry about these fees while renting the property. 
  • 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 allows you to swap the 20% for a reasonable 3%. Much better, right? 
  • An edge during bidding: Our buying experts know their way around bidding and negotiating an attractive deal. We also buy all rent-to-own homes with cash, so you don't have to rely on a lender. Plus, buying in cash often helps secure a discount on the original sale price, meaning lower rent payments for you.
  • 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—even if prices rise more during the contract. So you can build equity without actually buying the property first.

How does rent-to-own work in Australia?

The rent-to-own process will differ depending on who you use. 

At OwnHome, we use a simple five-step process. 
  1. Five-minute application: We'll assess your details to see your best options and ensure we're the right choice for you. You won't have to wait long for a response, and it won't affect your credit score. Plus, there's no commitment to go further if you don't like what you see. 
  1. Choose your home: If you're happy to work together, we'll give you a budget, and you can start hunting for your dream home. Then we can begin our assessments and negotiations. And with our cash-only buying process, you'll have the edge over other prospective buyers.
  1. The purchasing process: After we secure your dream home, we'll cover all payments and fees, i.e., stamp duty, real estate agent fees and insurance. All we need from you is a small initial payment that partly contributes to your purchase offset. You'll also need to sign a lease-option agreement.
  1. Move in: Once we close the sale, you're free to move in like you own the place! Plus, roughly one-third of your fortnightly payments will continue to grow your future deposit. 
  1. Buy your property: We allow you to purchase your home anytime between the 2nd and 7th year of the rental period. You'll be able to use your purchase offset and any other savings to buy the property. If you have a change of plans, that's okay too. We won't force you to buy the home at the end of the rental period.
Now here are some other questions that people typically ask: 

Can I choose my own home?

Yes, you can choose any home that meets the criteria we share with you. One caveat is that some schemes rely on housing developers, so you may not get to select your exact home. 

Our criteria at OwnHome ensures you choose high-quality properties that are worth your hard-earned money. We don't want your homeownership dream to be ruined by issues later down the track.

Here's a general overview of our criteria: 
  • Any home purchase needs to have a market value under $2.5m. 
  • You can choose between many property types, including terraces, apartments, townhouses and free-standing houses. However, studio, off-plan purchases and one-bedroom apartments aren't eligible for our rent-to-own services. We also can't approve land-only purchases. 
  • Any home you choose needs to have a minimum area of 50 m2. We also have an acreage restriction of up to 2 acres of land. Any properties in between these criteria are fair game. 
  • We don't accept properties that need renovations because you never know the extent of the issues until renovations are complete. And most of the time, these renovations go over budget—not a good start to your homeownership journey. 

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. 

Here's what to expect:
  • An initial 3% payment upon sale closure. It covers a 2% starter payment and a 1% initial deposit into your purchase offset. 
  • Fortnightly repayments (like you have as a renter) with about 35% of this payment contributing to your purchase offset. 

What are purchase offsets?

A purchase offset is a savings pool that you can use for a deposit on the home you rent with us or anywhere else. You build this deposit from your initial 3% and part of your regular rental payments. 

No matter the price of your property, we aim for you to save about 2.5% of your home's value each year. So after seven years, you'll have saved 18.5% (including the initial 1% deposit) of the property price. 

You'll also be able to watch your nest egg grow from your online OwnHome dashboard. And you're free to use your purchase offset to secure a home loan for another property if you change your mind at the end of the lease.

Who is rent to own suitable for?

Rent to own is suitable for most people in Australia. However, every company will have different criteria. 

At OwnHome, we want to help as many people as possible get a foothold in the property market. But we still have criteria you need to pass to ensure rent to buy suits you. 

Here's what we look for: 
  • People who are willing to seek independent legal advice and think deeply about whether OwnHome and a rent-to-own agreement are right for them. 
  • A credit score of at least 600. If you currently have bad credit, you can contact us for some advice—we'd be happy to help. 
  • At least three months of steady income, whether self-employed or working for a company. However, we may be able to help if you've just changed jobs. 
  • People who want to buy property in Brisbane, the Gold Coast, Greater Metro Sydney, Newcastle and Wollongong. However, we're always working on expanding our services to help more first-home buyers. So apply anyway, and we'll see what we can do.

Rent-to-own homes may be your solution to rising property prices

It's difficult to know how property prices will change in the future. But with rent to own, you can lock in a future price and short-cut the process of saving a 20% deposit.

If house prices drop dramatically, you don't have to exercise your buying rights. But if prices continue skyrocketing, you reserve your home at a favourable price. 

Talk about a win-win situation! 

If rent-to-own sounds like it could be right for you, fill out our quick five-minute application to see if you qualify. And if you have other questions about the process, you can contact us anytime.

Discover Your Buying Power With OwnHome

Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).

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