How Does Rent-to-Own Compare to a Guarantor Loan?

There are low deposit and no deposit ways to buy a home in Australia. But which ones better?

Home Ownership
Guides
by
Dawn Teh

In recent years, the cost of saving for a typical mortgage deposit has become increasingly difficult for many Australian first home buyers. 

According to a survey by Finder, the average 20% deposit reached $119,560 in 2022. This was an 11% increase from a year ago. 

In addition, these deposit costs often exclude things like stamp duty and other fees, which can add thousands of dollars to the total cost of buying a home. 

For many people, this makes dreams of being a homeowner a lot more unattainable — especially when you think about increased rental and daily living expenses. 

Fortunately, there are now a number of low-deposit home loan options available, which can help buyers get into the property market sooner. 

While these loans typically come with higher interest rates and fees, they can still represent a significant saving compared to renting. 

In this comparison, we'll be specifically comparing two options: Rent-to-Own vs. guarantor home loans.

If you've been struggling to save for a deposit, such options could provide a much-needed lifeline.

Keep reading to discover which might be a better path towards home ownership for you!

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).

Quick Look: Rent-to-Own with OwnHome vs. Guarantor Loan

HTML Table Generator

OwnHome (Rent-to-Own)
Guarantor Loan
Move into your home now  Yes Yes
Upfront costs

3% of the purchase price


(1% of this goes to your security deposit)

0-15% deposit


Guarantor pledges home equity to make up the difference

Build up a security deposit while you stay

About 35% of your rent goes to your security deposit


(security deposit is deducted from the final purchase price)

Not applicable


Your deposit is paid upfront

Fixed purchase price
Yes   Yes
Ongoing payments Fortnightly payments that cover your rent and security deposit
Monthly loan repayments
When is the home in your name  When you choose to buy back your property from OwnHome, 2-7 years after the start of the agreement
 Immediately
Property buyback costs  Same as securing a home loan

Not applicable


Home is yours from the start

What is a guarantor home loan?

Home loans typically require a 20% deposit if you don't want to pay Lender's Mortgage Insurance (more on this later).  

A guarantor home loan allows you to put down a smaller deposit — usually 5-10%. But in some cases, you may not need to have a deposit at all. 

However, you need a guarantor to make up for the difference (15-20%) by pledging part of their home equity. 

The guarantor does not lend or give you any money in this arrangement. You will also be responsible for paying your loan repayments — not your guarantor.

Your guarantor's home equity is only at risk if you can't pay for your loan anymore and your home loan lender is unable to recover the amount back from selling your property. 

Example
Assuming you want to buy a property that costs $500,000, you would usually need a 20% deposit (that's $100,000 in this example).

If you choose to have a guarantor home loan, your guarantor can pledge $100,000 of their home equity as security for your loan.

Alternatively, you can pay a 5% deposit ($25,000). Then, the other 15% ($75,000) to meet the 20% criteria will come from your guarantor's home equity.

How much will a guarantor home loan allow you to borrow?

The amount you will be able to borrow on a guarantor home loan will depend on your situation. But first home loan applicants will generally be able to borrow up to 105% of the property’s value. 

What are the interest rates like with a guarantor home loan?

The interest rates can vary widely depending on your lender. But generally, their rates can be quite competitive and comparable to a traditional mortgage as the 20% deposit requirement is essentially fulfilled in both cases. 

How much deposit do you need with a guarantor home loan?

You typically need a 5-15% deposit for a guarantor home loan. But there are instances where your guarantor can guarantee the full 20% deposit. 

Do you pay lenders mortgage insurance (LMI) if you have a guarantor?

You generally will not need to pay LMI with a guarantor home loan. 

LMI is an insurance that is paid by the borrower to protect the lender in the event that the borrower cannot repay the loan. 

Borrowers usually only need to pay LMI when the lender deems the loan to be risky — like when the deposit amount is low and the loan amount is high. 

They calculate their risk through a metric called the loan-to-value ratio (LVR) which is the loan amount divided by the property's value. As long as the LVR is below 80%, most lenders won't require LMI.

In a guarantor home loan, your deposit along with your guarantor's pledged home equity should add up to at least 20% of the property's value — which is why you'll avoid any LMI fee.

Key Terms
Lenders mortgage insurance (LMI)
Lenders mortgage insurance (LMI) is a type of insurance that protects the lender if the borrower defaults on their loan.
This insurance is typically required when the borrower has a less than 20% deposit, or when they are considered to be high risk.

Loan-to-value ratio (LVR)
The LVR is a metric that's used by lenders to calculate the risk of the loan. To get the LVR, you simply divide the loan value by the value of the property.
As your deposit decreases, the loan value, LVR, and lender's risk go up. They adjust for this risk by increasing interest rates.

Who can be your guarantor for a home loan?

  • A guarantor needs to have enough equity in the property they intend to pledge.
  • Many lenders prefer a guarantor to be a close family member.

Your guarantor likely won't need stable employment (but this also depends on the lender's policies).  

How long does a guarantor stay on a mortgage?

Once you've made enough mortgage repayments and your equity in the home grows to 20%, your guarantor can apply for their obligations to be removed from the loan. 

What's good about guarantor home loans?

Guarantor home loans offer a number of benefits to borrowers who may not qualify for a traditional mortgage on their own:

Low or no deposit needed

With a guarantor home loan, you only need a 5-10% deposit (sometimes, no deposit at all!). This is because the guarantor takes on some of the financial risk associated with the loan. 

This can be a great option for people who don’t have much money saved up or don’t want to use all of their savings on buying a home.

Increased chance of getting a home loan

When you have a guarantor to take on some of the financial risk associated with a home loan, it reduces the risk to the lender. This ultimately makes it easier for them to approve your loan. 

You can possibly get a higher loan amount

Depending on how much home equity your guarantor puts up as security for your home loan, first home buyers may be eligible to borrow up to 105% of the property's value on a guarantor home loan.

Some of the borrowed sum could even go towards other fees like stamp duty. 

Possibly lower interest rates

With a guarantor pledging to repay the loan if you cannot, this provides the lender with more assurance that they will be repaid. This allows them to offer you an interest rate that is comparable to a traditional mortgage with a 20% down payment. 

Other plus points

  • No LMI fee required
  • You immediately start building equity in your home 
  • You'll most likely be able to access features associated with a traditional mortgage like offset accounts or redraw facilities along with options for fixed and variable rate interest.
  • The guarantor can be released from their obligations to this loan once you’ve built up enough equity in the home. 
  • You have complete control over the home as a homeowner. So you can refinance, demolish, or renovate, as you please. 

What are the disadvantages of being a guarantor?

Guarantor home loans can help you to get a loan with a smaller deposit so you can start climbing the property ladder sooner.  

But there are several drawbacks to be mindful of — especially from the perspective of your guarantor. 

If you default on your loan, your guarantor will be liable for the debt. This means you’re spreading financial risk to another party other than yourself.

In many cases, parents are usually the ones who will fill the role of guarantor. They will most likely be in the later stages in life which usually comes with lower earning power along with approaching retirement. So the financial risk may be even greater relative to their life phase. 

Your guarantor is also most likely to have a close personal relationship with you. So if things go south with your home loan, it could put a strain on your relationship with the individual.

How Does Rent-to-Own Work?

Rent-to-Own is an agreement where people rent their dream home with the option to buy it at a later time. 

Your fortnightly payment will usually have a rental portion along with a payment to cover your option to purchase the property. 

That's an overview of how most Rent-to-Own programs work. But because there can be a lot of variance between service providers, here’s a look at what we offer at OwnHome.

OwnHome: How does our Rent-to-Own pathway work?

OwnHome helps turn renters into homeowners. We support homebuyers to reach their dreams of homeownership faster through a Rent-to-Own pathway.

We currently serve those who intend to be owner occupiers of the property in Greater Metropolitan Sydney, Wollongong, Newcastle, Brisbane and the Gold Coast. This means we can help almost half of Australians, but we’re working quickly to make sure OwnHome is available for anyone, wherever they live (we do not assist with investment property purchases, although you may still be eligible for OwnHome if you already own an investment property).

OwnHome is also backed by the Commonwealth Bank of Australia.

Here’s how it works:

  1. OwnHome buys your dream home and you move in now. At this point, the home is in OwnHome's name. To enable us to purchase the home, you make a one-time, upfront payment of 3% of your home’s value. 1% of your home’s value goes directly to your security deposit, which you can use to buy back your home at the pre-set price.
  2. Build your security deposit with your fortnightly payments. Each fortnightly payment covers rent and your growing Security Deposit. About 35% of your weekly payment goes straight to your security deposit (which can be deducted from the pre agreed price when you purchase your property from OwnHome).
  3. Buy your home from OwnHome after 2-7 years. The purchase price will be fixed so there are no surprises! 
Key Term
Security Deposit
The "Security Deposit" is an accumulated sum that comes from your fortnightly payments to OwnHome and it can be used when you want to buy your home back from OwnHome.

Approximately 35% of your fortnightly payments go to your security deposit.

How much does Rent-to-Own cost?

To get started with OwnHome, you pay a starter fee (2% of the sale price) and a security deposit (1% of the sale price). This security deposit contribution goes back to you — as it can be used when you purchase your home back from OwnHome.

When you’re in your home, you pay your weekly payments to cover rent and your security deposit which gets you one step closer to buying your home from OwnHome in the future.

Example

Let’s assume your dream home costs $1,000,000. OwnHome has assessed your application and approved you to purchase a home up to the value of $1,000,000. With OwnHome’s help you win the bid, and you start living in it.

Your initial upfront payment to set up this agreement will be 3% of the purchase price.

You pay fortnightly rent to OwnHome, with a portion (about 35%) of this payment going to your security deposit. Your security deposit can go towards buying your property from OwnHome at a later time.

At the start of your agreement with OwnHome, you know your pre-agreed purchase price as well as your repayments for the next 2-7 years—giving you certainty from day one. At any point after the minimum 2 year period, you can opt in to purchasing your home back from OwnHome.

Each year, the buy-back price of your home increases by 3.8%.

Suppose your agreed purchase price is $1,200,000 after 5 years with OwnHome and you've contributed $150,000 to your Security Deposit. You only have to secure a loan of $1,050,000 to buy your dream home from OwnHome.

Also, if your property’s market value has increased above OwnHome's pre-agreed price, you benefit from the difference. So if the OwnHome price is $1,200,000, but the home’s market value at the time you want to buy it is $1,400,000, you keep the $200,000 capital upside.

Essentially, your home equity is $350,000: a $150,000 security deposit, and $200,000 in capital gains. So you’ll be securing $1,050,000 of financing with an LVR of 75%.

How long do Rent-to-Own agreements last?

The agreement time frame can vary widely between different Rent-to-Own arrangements. At OwnHome, we provide customers with the option of buying their home back from us between 2-7 years from the start of the agreement. 

What's good about OwnHome's Rent-to-Own pathway?

Just a 3% deposit to get started

There's no need to save up for a 20% (or even a 5% deposit!). With OwnHome you only pay 3% of the purchase price upfront. After that, your fortnightly payment covers rent plus ~35% accrues towards your security deposit which can go towards buying your home from OwnHome. 

Start living in your dream home now

There's no need to wait for years to build up your home loan deposit. Start living in your dream home now with just a 3% deposit! When you have saved enough towards your purchase offset to get a home loan, we will assist you in rolling off to your own mortgage.

Fixed purchase price

The price that you buy your home back from OwnHome will be fixed. Before you enter into the agreement, you’ll know how much the price will increase each year.

There's no need to involve others in your home loan

Everyone's circumstances are different and you may not be able to (or choose not to) get financial help from loved ones. With OwnHome, you can maintain full ownership over your own property's finances. 

Even though a Mozo survey reports that parents in Australia are contributing an average of $70,000 to their children's home deposits, this isn't always an option for everyone. 

Potential capital gains  

If your home valuation grows, you keep the capital gains above the pre-agreed purchase price. 

Start living like a homeowner!

Feel free to renovate and make it a space of your own. Our answer to most renovation requests is 'yes'. But of course, you will not be able to demolish and rebuild.    

Other key benefits of OwnHome

  • You can walk away from the agreement at any time (unlike a mortgage) — you only lose your fortnightly payments.
  • You still qualify for government grants like the first home owners grant when its time  to buy your home from us. 
  • We will need you to seek third-party advice to understand your OwnHome agreement fully (this includes financial and legal advice).
  • Access to our home buying experts who will assist you with negotiations and the whole purchase process. We’re on your team.
  • Our Hardship Policy allows us to assist you in difficult times. If you're having trouble making payments, we're here to help you 
  • OwnHome pays for property tax (stamp duty), legal fees, strata levies, and some maintenance costs (while you're renting from us). 

Use this calculator to find out how much you'd save with OwnHome compared to renting and saving.

Discover Your Buying Power With OwnHome

What are the risks associated with Rent-to-Own? 

Historical data shows that Australian property prices have been on the uptrend over the past 10 years (with Sydney house prices increasing by 146.4% between the early 2000s to 2021).

But with Rent-to-Own, there's always a chance that the market value of your property could drop below your fixed purchase price when you decide to buy it from OwnHome. 

In such cases, you still have a few options. You can:
  • Postpone your buyback from us.
  • Contribute to the price difference at closing. 
  • Get a second appraisal from another mortgage lender. 

How do I qualify for OwnHome's Rent-to-Own pathway?

OwnHome looks at various factors when considering whether our services are ideal for your situation. Here's a look at some of our application criteria:

  • We might request a credit report outlining your credit history and if you have any other personal loans — not to worry, this won't affect your credit score. But having bad credit like failing to pay debts in the past can affect your OwnHome application outcome. 
  • 3 months of steady income.
  • Household income of at least $150,000 in QLD and $180,000 in Sydney. 

Is Rent-to-Own or guarantor home loan better for you?

Now that you have a better understanding of the Rent-to-Own and guarantor home loan pathways, which is better:

Upfront costs (deposits)

Rent-to-Own and guarantor home loans can both be attractive because the upfront deposits are both lower than a typical 20% deposit home loan. 

However, OwnHome's Rent-to-Own pathway has even more of an advantage than a guarantor loan because the initial deposit is only 3% of the property's value. Plus, 1% goes to your security deposit which will be deducted from your final purchase price when you choose to buy back your home.  

If you compare this to the usual 5% deposit with guarantor loans, this presents an even more attainable starting point

Does it involve loved ones?

With Rent-to-Own agreements, you are the only one involved in the agreement. But with a guarantor home loan, you have a loved one that will be exposed to your loan's financial risks. If you cannot pay back your loan, your guarantor may lose their pledged home equity. This can put a financial strain on your loved one and can lead to relationship problems.  

Equity

Another big difference comes down to equity. With Rent-to-Own schemes, you will not build up any property equity until you purchase it. This means that even though you’re paying rent and security deposit, you can’t borrow against your future home or use it as collateral for other loans. However, if your capital gains are higher than the pre-agreed price, you unlock the capital gain upside as soon as you roll off to a mortgage after your minimum OwnHome period.

Control over your home

Going with a guarantor home loan means that you have the exact same homeowner rights — just like if you had been approved for a traditional home loan. So you can have complete control over what you want to do with your property!
With OwnHome, we want our future homeowners to make the place their own. So most renovation requests are a 'yes' from us. But, things like demolition and a complete rebuild won't be possible. 

Ultimately, each person's home buying journey is different and you'll need to weigh up the pros and cons of each option.

If you'd like to compare the upfront costs of OwnHome vs. a traditional mortgage, hop over to our calculator here to discover how much you can save:

Discover Your Buying Power With OwnHome

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