How Does Rent-To-Own Compare to a Typical Mortgage?

Homeownership has long been part and parcel of the Australian dream.

Home Ownership
Guides
by
Dawn Teh

Homeownership has long been part and parcel of the Australian dream. 

However, it has become increasingly difficult to purchase a home in recent years — particularly for young, first home buyers. 

With house prices soaring and wages stagnating, many struggle to even save up for the 20% deposit on a typical mortgage. 

Fortunately, there are other pathways to start climbing the real estate ladder other than securing a traditional home loan. 

One route involves "rent-to-own" models where you basically rent a property with the option to buy it later. OwnHome are an Australian rent-to-own provider who allow you to live in your dream home, while you save for it.

The upfront costs are usually lower than a regular mortgage and could benefit those that need a stepping stone to full-fledged homeownership. 

But, there are certain downsides you need to be aware of too — so it's not for everyone. 

In this article, we compare rent-to-own vs. a typical home loan so you can decide which is the better choice 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 Comparison: Rent-to-own with OwnHome vs. A Typical Home Loan

OwnHome (Rent-to-own) Typical Mortgage
Move into your home now Yes Yes
Upfront costs 3% of the purchase price

(1% of this goes to your security deposit)
Typically a 20% deposit

Stamp Duty

Conveyancing costs

Other administrative fees
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)
Your 20% deposit needs to be paid upfront
Fixed purchase price Yes Yes
Ongoing payments Fortnightly
payments that cover your rent and security deposit
Monthly repayments that cover principal and interest
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 None

How does a typical home loan work in Australia?

A home loan (also called a mortgage) is the amount of money borrowed to purchase a property. 

When you approach a lender, they'll typically lend you 80% of the home's value — this is called the principal

The other 20% needs to be paid by you upfront to the lender — this is the deposit

This also puts your loan-to-value ratio (LVR) at 80% (loan principal divided by the property value). 

The LVR is important because it's the metric that lenders use to calculate how much risk they're taking on by lending you the sum you're requesting. 

Lenders typically like to see an LVR that's no higher than 80% because it would mean that they're taking on more risk. 

After the loan amount has been confirmed, your lender will determine a schedule for you to pay back the loan over a certain period (usually between 25 to 40 years, though the terms are usually negotiable).

In addition to paying back the principal, your lender charges you a fee for borrowing money. This fee is called interest. It's calculated as a percentage of the amount you've borrowed.

Each month, you'll need to make payments to your lender (called monthly repayments) based on your mortgage payment schedule determined by your lender.

The more you've paid back your lender, the more equity (your stake) you build up in your home. 

The loan is secured by the property itself, which serves as collateral (which the lender can seize) in case the borrower cannot repay the loan.

Key Terms
Deposit
This is the upfront amount you pay to your lender — usually 10-20% of the property's total purchase price. The greater your deposit is, the less you will borrow from your lender.

Loan Principal
The amount of money you borrow from the lender to buy the property.

Interest Rate
The interest on a home loan is the fee charged by the lender for using their money. It's calculated as a percentage of the loan amount and can be either fixed or variable.

Monthly repayments
This is the money you pay back to the lender each month to cover the loan.

Loan-to-value ratio (LVR)
The LVR is the loan value divided by the value of the property you're buying. The higher the LVR, the riskier the loan is to the lender. This means that the interest rates they offer will also likely be higher.
Example
You purchase a property for $500,000 and put down a deposit of $100,000 (20% of the purchase price). This means you will be borrowing $400,000 from your lender. If you choose a 5.1% p.a. variable interest rate to be paid back on a 30-year term (principal + interest), your monthly repayments will be approximately $2,172.

Interest rate types

With a traditional mortgage, there are also different types of interest rates available. 

Fixed interest rate mortgages offer stability by locking in an interest rate for a certain period of the loans term. This can be helpful if you're planning on staying in your home for a long time. However, it also means that you won't be able to take advantage of lower rates if they become available.

On the other hand, variable interest rates may go up and down over time. This can be risky, but it can also offer the potential for lower rates down the road. There are usually no closing charges when you refinance a variable rate loan. Plus, you're more likely to have added features like extra repayment options to pay off your home loan faster, or offset accounts that help to lower your interest rate. 

What are the steps for home loan approval?

There are several steps to go through before you get approved for your home loan. 

Typically, you'll need to get some paperwork ready such as:

  • Your application form
  • Income documentation (like pay slips)
  • Savings information (bank statement)
  • Any current debt — Your lender will want to examine your credit score and whether you've taken any other personal loans. Bad credit can affect your application outcome.

If you're unsure about whether you meet the criteria for the type of loan you're after, you can always ask a lender for pre-approval first. 

So instead of going through with a full application from the start, you submit a "partial application" with some information about yourself. Your lender will then give you an estimate of how much you'd be able to borrow from them. 

After you've completed a full loan application, it could take a few weeks for it to be approved before the property title is moved to your name. 

Pros and cons of a typical home loan

For many people, a traditional mortgage is often seen as the ideal way to enter the real estate market. But there are some disadvantages to be aware of too.

✅ Pros ❌ Cons
The property is in your name from the start of your loan Big upfront costs (20% deposit, stamp duty, etc.)
Renovate and design your home as you please Your money is tied up in your home. You may lose out on other investments.
You start building equity in your home from the start There are many other homeownership costs (council fees, repairs, home insurance, etc.)
Potential capital gains if your property value increases
Enter the housing market immediately

One of the most significant barriers for first home buyers in securing a traditional mortgage is the 20% deposit. 

A 2022 study by Corelogic (a property analytics service) has reported that it would take the average Australian an average of 11.5 years to save up for the 20% deposit on a home loan. 

While there are several no to low-deposit options, one alternative homeownership pathway that's been growing in popularity are rent-to-own agreements. 

What are rent-to-own contracts?

In a rent-to-own scheme (sometimes called rent-to-buy schemes), a buyer agrees to pay rent to a seller, with the option to purchase the property at the end of the rental period (usually several years after the start of the agreement). 

During this time, the buyer will also be required to pay an “option fee” in addition to the regular rent payments. This fee may act as a downpayment for the property's purchase price if the option is exercised. The buyer will forfeit any money paid towards the rent premium if the option is not exercised. 

This is the general way that most rent-to-own agreements work. But there can be significant differences depending on the service provider.

Here’s a more in-depth look at our rent-to-own program at OwnHome:

How does OwnHome's rent-to-own pathway work?

At OwnHome, we help people reach their dreams of home ownership faster through a  rent-to-own pathway. OwnHome is backed by the Commonwealth Bank.

Here’s how it works:

Five steps from Rent-to-own with OwnHome
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%.
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.

What are the benefits of rent-to-own with OwnHome?

What's good about OwnHome? Here are some of the key benefits:

  • Lower upfront costs — Instead of a 20% home deposit, OwnHome only needs you to put up 3% of the property's value. Plus, 1% of that gets contributed to your security deposit! 
  • Move into your dream home now — Start living like a homeowner instead of a renter — feel free to do renovations and make it yours.
  • Build your security deposit while living in your home — 35% of your fortnightly payment goes towards your security deposit which can be used when buying back your home. 
  • Our home buying experts guide you along the way — They help with negotiation and the whole purchasing process.
  • Fixed purchase price when you buy back the property so there are no surprises.
  • Potential capital gains — If your home market valuation grows, you keep the capital gains above the pre-agreed price.
  • We support objective advice — We require that you speak to your own advisor (e.g. for financial and legal advice) before signing up with OwnHome.
  • OwnHome takes care of property tax, strata levies, and some maintenance costs (while you're renting from us). 
  • We have Hardship Policy protections in place. If you can't make payments, we're open to exploring options with you (e.g. reducing security deposit payments).
  • You can still qualify for government grants — Having an OwnHome agreement does not disqualify you from things like the first home owners grant when you want to buy back your home.   

What are the downsides of rent-to-own with OwnHome? 

Rent-to-own can be a great way to enter the property market. But there are some disadvantages to be aware of. 

  • You've still got a one-off 3% upfront fee. But, this is significantly less than the usual 20% deposit. Plus, 1% of OwnHome's 3% fee goes to your security deposit. 
  • It only becomes your own property later on —  The home is only in your name when you buy it from OwnHome.
  • There's a risk your home value might drop below the pre-agreed purchase price. However, unlike a mortgage, you can always walk away from your OwnHome agreement. You only lose your accumulated security deposit. 
  • We are unable to assist buyers looking to purchase investment property. 

Who is OwnHome best suited for?

OwnHome's rent-to-own might suit you if:

  • You're having problems securing a traditional mortgage. 
  • You want to get on the property ladder quicker without saving for a hefty 20% home deposit. 
  • You're not able to receive financial assistance from parents or loved ones.
  • You'd like to have an advantage using OwnHome's all-cash offer when bidding for your dream home. 

How much money can I save by renting-to-own versus a typical mortgage?

It's difficult to say whether the overall costs of rent-to-own or a typical mortgage are lower in all cases. This is because there are just too many individual variables to consider depending on your own circumstances — this includes loan terms, interest rates, and when you choose to buy back your property.  

However, OwnHome's rent-to-own pathway is specifically designed to help first time home buyers save on upfront costs. Here's a comparison of how much it'd cost you to get started buying a home in Sydney using OwnHome compared to a traditional lender: 

Use our calculator to discover how much you'd save with OwnHome compared to renting and saving.
Discover Your Buying Power With OwnHome

How much money is put down in rent-to-own schemes?

At the start of your OwnHome journey, you will need to pay an upfront fee of 3% of your property's value when we purchase your home. 

1% of this fee goes to your security deposit which you can use to buy back your home from OwnHome at a later time. 

As an estimate, you would pay about $30,000 upfront for a $1,000,000 home.   

What is the approval process like for OwnHome?

At OwnHome, we look at several factors when determining whether you're a good candidate for our services. This includes:

  • Your credit score or credit history.
  • Household income.
  • Past 12 months of banking transactions.

Why not find out right now if OwnHome is right for you with our online pre-qualification application! It's free, only takes 5 minutes, and won't impact your credit score.

Discover Your Buying Power With OwnHome

Summary: OwnHome (rent-to-own) vs. a typical home loan?

Rent-to-own and traditional mortgages both have their pros and cons. Which is better for you ultimately comes down to your current personal finances and goals. Here's a quick summary of how they stack up based on various criteria: 

Upfront costs of buying a home

One of the biggest differences between rent-to-own and a typical mortgage is the upfront costs. With OwnHome, you only pay a 3% starter fee (that's $15,000 for a $500,000 home). Plus, 1% of this fee is added to your security deposit which can be used when buying back your property from OwnHome in the future.

In contrast, a regular mortgage usually requires a 20% deposit from the start. That's $100,000 for a $500,000 home. 

Timing

With the lower upfront costs associated with OwnHome, you can start climbing the property ladder sooner as you won't have to worry about saving up for a 20% deposit. 

Bear in mind that with current property prices, some experts have estimated that it would take about a decade to save up for the deposit on an average Australian home. 

Timing can be crucial for practical reasons (e.g. your family needs the space now), but also financial reasons. 

If you're eyeing a suburb with quickly-rising property prices, getting in the market as soon as possible could benefit you in the long term. 

With OwnHome, we lock in your purchase price so there will be no surprises down the line when you choose to buy your home from us. 

If the market value of your property increases past your agreed OwnHome purchase price, you get to keep the upside!

Home equity

With a mortgage, you'll be able to use your home equity to get a new loan because the home is in your name. For OwnHome's rent-to-own arrangement, you won't be able to do this until you've officially repurchased your property from OwnHome. 

Control over home 

With OwnHome, we want you to have as much liberty with home renovations. So if you want to paint your home or redo the kitchen, the general rule is that we would probably allow it.

However, tearing down the entire home won't be an option until you buy back your home from OwnHome.

So with rent-to-own options, your initial control of the property is a little more limited while you're in the rental phase of the agreement. 

If you're keen to explore the details around OwnHome's rent-to-own pathway, we can do some of the number-crunching for you!

Just head over to our calculator to discover how OwnHome stacks up against a traditional mortgage. 

Discover Your Buying Power With OwnHome
Share
Ready to
move in your
Dream Home?