Is Rent-to-Own a Legitimate Way to Buy a Home?
Between 2011 and 2022, the average house price in Sydney went from $540,800 to $1.2 million.
When we look nationwide, we see similar statistics as a 2015 Reserve Bank of Australia report stating that the average Australian house price has increased by 7.25% every year for the past 30 years.
On the other hand, data from The Australian Bureau of Statistics shows that annual wage growth has only been hovering at 2-4% between 2011 to 2021.
Unsurprisingly, it's become increasingly difficult for first home buyers to save up for a typical 20% deposit. To overcome this hurdle, over 60% of young Australians depend on the Bank of Mum and Dad for financial assistance when buying a home.
For the rest who can't access such help, some are resigned to being renters for longer. Others, however, have started looking for alternative ways to own a home without taking out a traditional loan.
And fortunately, there are now several legitimate no- and low-deposit home loan options out there. One such pathway is rent-to-own which has been gaining popularity over the past few years.
With a rent-to-own agreement, you essentially agree to pay rent on a property for a set amount of time, during which you also have the option to purchase the property. Each monthly payment also comes with an additional cost to maintain your option to buy that specific property.
This real estate agreement offers a number of benefits — including a smaller deposit, the ability to move in immediately, and the potential to build equity over time.
However, this arrangement has some downsides (as with any real estate loan structure).
So keep reading to discover the details around rent-to-own pathways and what are the pros and cons.
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).
Is rent-to-own legit?
Because rent-to-own is a relatively new real estate structure, the laws around it can vary between states in Australia.
At the time of writing, rent-to-own is a legitimate and legal pathway to homeownership in Queensland and New South Wales.
Some people shy away from rent-to-own property because they're not quite sure how it works, or they think it may be too good to be true.
However, rent-to-own property can be a great option for those who are looking to buy a home but may not have enough money saved for a down payment.
The key is choosing a reputable rent-to-own provider as there have been cases of unscrupulous landlords using the arrangement to take advantage of tenants.
But remember, even traditional mortgages can be illegitimate if you go with the wrong mortgage broker or lender. They may charge excessive fees, offer loans with unfavorable terms, or even refuse to provide the promised loan funds.
So most importantly, do your homework, don't rush into an agreement, always read the fine print, and seek third-party advice before signing any agreement!
Overall, rent-to-own is a legitimate housing option when you go with the right provider.
What is rent-to-own? How does it work?
Rent-to-own (also called rent-to-buy schemes) is a type of rental agreement that offers tenants the opportunity to rent a property for a set period with the option to purchase the property at the end of the lease term.
The details of such lease agreements can vary between providers in terms of the length of the rental period, the amount of rent, and the property's purchase price.
Here is more information about how OwnHome's rent-to-own pathway to homeownership works:
The steps involved in OwnHome's rent-to-own process
At OwnHome, we help first time home buyers a chance to achieve their dreams of homeownership through a rent-to-own pathway.
Our program assists those who intend to be owner-occupiers of their home in the Sydney and Queensland area (investment properties do not qualify).
Our company is backed by the Commonwealth Bank of Australia.
Here's a closer look at how OwnHome works:
- Go home shopping and OwnHome buys your dream property! It will be in OwnHome's name at this point. You only need a 3% deposit of the sale price to get started (but 1% goes to your security deposit which can be used to buy back your property).
- You move in now and start growing your security deposit. Part of your fortnightly payment is for rental, and around 33% goes to building your security deposit which will come off the final buyback price.
- Buy your home after 2-7 years from OwnHome. We will agree on your buyback price at the start of our agreement, so there won't be any surprises!
How much does renting-to-own really cost?
Here's a breakdown of what you and OwnHome will be paying when you opt for our rent-to-own pathway:
Rent-to-own: What are the pros and cons?
Lower upfront costs — No 20% deposit
To get started with OwnHome, there's only a 3% upfront fee — not 20%, not even 5%.
Move into your dream property immediately
Instead of waiting for years to save up a 20% home loan deposit, live in your ideal home now while you save for it! If it's still your dream place after a few years, you can purchase it from OwnHome.
Build your security deposit as you live in your home
Your fortnightly payments to OwnHome aren't just rental payments. A part of it (around 33%) gets added to your security deposit. This amount can be used down the line when you buy your home from OwnHome. Think of it like you're saving up for your deposit while living in your home.
No-surprises buyback price
The price at which you buy your home back from OwnHome will be fixed — no matter what the property market is like down the line. At the start of the agreement, you will be aware of the fixed rate at which the price will increase each year.
You won't need to trouble other in your home's finances
Not everyone is able to (or wants to) get financial help from loved ones. With OwnHome's lower barrier to entry, it's easier for you to enter the real estate market on your own without troubling others.
You might benefit from capital gains
If your home's market value increases past OwnHome's fixed buyback price, you keep the difference!
Start having a homeowner mindset
No more worrying about whether your landlord will approve the new picture you'd like to hang on the wall. Generally, we almost always say 'yes' to home improvement requests and want you to make the property a space of your own. (But of course, demolishing and rebuilding won't be allowed).
Other OwnHome positives
- You're not locked into a mortgage — If you decide not to purchase the property, you can simply walk away. There's no obligation to buy the property, so you aren’t on the hook for the full house payment. You only forfeit your fortnightly security deposit payments.
- You can still apply for government grants when you choose to buy back your home. Having an OwnHome agreement does not disqualify you from schemes like the first home owners grant.
- We support you in making the most informed decision by requiring you to seek third-party financial and legal advice. This is to ensure that you have weighed up all the costs and benefits of an OwnHome agreement.
- Our home buying experts are here to help you with the entire purchase process — this includes negotiating and property valuations.
- We have a Hardship Policy to help customers through tough times. If you're financially stretched and unable to meet fortnightly payments, we try our best to support you through this period (e.g. lowering security deposit payments).
- OwnHome takes care of the property tax, strata fees, and certain maintenance costs during the rental phase.
There are also some downsides to rent-to-own that you should consider before entering into an agreement:
- Some may still be unable to afford OwnHome's 3% initial fee.
- You don’t have complete freedom to alter your home until you buy it back from OwnHome.
- If you have to walk away from the agreement, you will likely lose the fortnightly payments you've made. But you might get some of your security deposit back depending on the property's current value.
- The market property value might drop below the pre-agreed OwnHome purchase price.
How to know if a rent-to-own scheme is the right choice for you
Rent-to-own is a great opportunity but it might not be for everyone.
If the following applies to you, then OwnHome's rent-to-own pathway may be right for you:
- You're having problems getting approved for a traditional home loan.
- You feel that saving up for a 20% home deposit will take too long for your situation.
- Getting help from the Bank of Mum and Dad is not an option for you.
- You want the upper hand when making an offer for your dream property as OwnHome is able to make an all-cash offer.
Questions to ask before signing a rent-to-own agreement
Not all rent-to-own agreements are the same as what we offer at OwnHome. To ensure that you're entering a fair agreement that fits your financial circumstances, here are some key questions to ask your provider.
- What are the fees or costs associated with the agreement? Clarify what are the option fees that give you the right to purchase the property at a later date. A monthly rental premium may be added to your regular rent payment and goes towards the eventual purchase price of the home. Finally, clarify who's responsible for paying any repairs or renovations that are needed to maintain the property during your tenancy.
- What is the purchase price of the property? Clarify how the eventual purchase price of the property will be determined. Is it fixed or variable? Will it depend on future market conditions?
- What are the terms of the lease? You'll want to be sure that you're comfortable with the lease's length and the monthly payment amount.
- What happens if you decide not to buy the property? Are there any penalty fees if you choose to walk away from the agreement?
- What is the status of the property? Is it in good condition or in need of repair? Be sure to inspect the property thoroughly before signing an agreement.
Verdict: Are rent-to-own homes a good idea?
Rent-to-own can be a good option if you're looking to buy a home, but may not have a large down payment.
It can also give you a little more flexibility like if you don't want to commit to buying your home at the moment. You can always move out if you decide it's not the right fit, or if you find better opportunities in the current housing market.
Rent-to-own is gaining in popularity, and the most reputable are being backed by significant financial institutions. As an example, OwnHome, is backed by the Commonwealth Bank.
However, there are some drawbacks to consider as well.
Similar to a mortgage, purchasing a home with rent-to-own comes with risks. If the value of your home drops below the agreed purchase price, your home may be worth less than what you need to pay for it. If you decide to walk away, while it won’t affect your credit score, you may forfeit the security deposit payments.
But with OwnHome, we have special hardship policies to assist our customers through any rough patches (e.g. extending the option agreement).
As with any major purchase, it's important to research and ensure that rent-to-own is the right option for you.
Want to know exactly how much you'd save with OwnHome? Use our calculator to find out now!
Do you need to have good credit in order to rent-to-buy?
At OwnHome, we'll need a credit report so that we can have an idea of your credit history — don't worry, this has no impact on your credit score. But if you've got a bad credit score (e.g. because of unpaid bills) this might affect your OwnHome application.
Other rent-to-own companies might have different credit requirements.
Do you need a deposit when renting-to-buy?
For OwnHome's rent-to-own pathway, we require a 3% deposit with 1% going to your security deposit.
What's the difference between lease-option Vs. lease-purchase rent-to-own contracts?
When it comes to rent-to-own contracts, there are two main types: lease-option and lease-purchase. Both types of contracts offer tenants the chance to own the property they are renting eventually, but there are some key differences between the two.
With a lease-option contract, the tenant pays a monthly rental fee, as well as an option fee that gives them the right to purchase the property during the lease or at the end of the rental period. If the tenant chooses not to purchase the property, they forfeit their option fee.
In contrast, with a lease-purchase contract, the tenant pays a monthly rental fee and a down payment that goes towards the property's purchase price. The tenant then has a set time period to obtain financing and complete the purchase. If they're unable to do so, they forfeit their down payment.