Top 5 misconceptions of rent-to-own

Rent-to-own is a new pathway to homeownership in Australia. So we expect questions and misconceptions about how the product may work for you.

Home Ownership
Guides
by
Erin Howell

Like any investment or financial product, it is essential to research and ensure that the product you are looking at is right for you. 

Rent-to-own is a new pathway to homeownership in Australia. So we expect questions and misconceptions about how the product may work for you.

It is important to debunk the home-buying myths you have heard about rent-to-own to ensure that you are equipped with the best information to make the right decision for you and your circumstances.

So let’s dive into some myths! 

Myth 1: It’s a scam! (Spolier alert - Rent-to-own isn’t a scam!) 

We often here ‘this sounds too good to be true’. This is the biggest misconception of rent-to-own, although it is important to read the contracts from different rent-to-own providers to understand how each model differs and what is right for you. 

There have been previous issues with rent-to-own models in Australia, particularly Victoria. 

In 2019 the Victorian government introduced a law to prohibit some of the problems with rent-to-buy providers. This law was introduced to protect buyers in various circumstances. There are still providers around who will have strict conditions on their home purchases, like; you must buy a new home, it can only be in specific suburbs, mostly new developments and they have specified builders you can use. 

This model is relatively new, and buyers should always do their own research and get independent legal advice before signing a rent-to-own agreement. At OwnHome, this is a mandatory step in our process to getting you into your home. 

Myth 2: I can only buy a new home with rent-to-own

The second misconception we also hear about rent-to-own is that you can only buy a new home. This is a myth.

Rent-to-own differs from the build-to-rent models that can be seen across Australia. These models often see you need to buy with a specific builder in exact locations and have a very niche place in the market.

When you rent-to-own with OwnHome, for the most part, you can choose any home on the open market! With a few exceptions. OwnHome is currently looking for 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. Apply through our website, and we will be in touch when we are in your area!

Whether you want a free-standing Queenslander as your new family home, you are looking for an inner city apartment in NSW or a bigger house in the suburbs - you can shop for homes in these areas within your home shopping budget.

Here are some of the exceptions:

  • We don't purchase knockdowns & rebuilds, homes that require significant renovations or off-the-plan homes.
  • 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 with OwnHome. We also can't approve land-only purchases as you will need to live in your OwnHome. 
  • Any home you choose must have a minimum area of 50 m2 and up to 2 acres. 

Myth 3: You’re treated like a renter

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. 

It is important to check your contracts with other rent-to-own providers to see what they allow you to do. 

Myth 4: Rent-to-own costs considerably more than renting + saving

On face value, yes, your payments with OwnHome will be greater than the amount you currently pay for rent. This is because you should see your OwnHome payments as renting + saving.

As we touched on earlier, purchasing with OwnHome means your weekly payments include paying rent plus paying your security deposit. Which you can look at as rent + savings. When you calculate the rate you save money for your future mortgage alongside the rent you pay weekly, you will see a much more comparable figure.

About 35% of your fortnightly payments go towards your security deposit. For a $1,000,000 home, that's about $500 per week in contributions to your security deposit.

This is the primary reason that rent-to-own payments look larger than your typical rent payments.

Myth 5: A rent-to-own program requires no upfront deposit

Home buyers in Australia are typically used to the traditional structure of purchasing a home. We often hear of buyers who have been swept up by a runaway market and have the goal post of saving their huge deposit taken further and further out of reach.

A traditional bank mortgage requires a 20% deposit plus homeownership costs, which can add thousands of dollars.

The first and more common misconception we hear about rent-to-own products, like OwnHome, is that you need no deposit to get into your home. While this isn't true, rent-to-own with OwnHome is a 10x improvement from a traditional deposit. Meaning that while a traditional deposit will cost you the 20% deposit + the extra costs, getting into your home with OwnHome will cost you just 3% upfront, 1% of which immediately goes towards your security deposit, bringing you one step closer to homeownership.

Myth 6: The cost of rent-to-own is based on the rental market, not the home price

The real estate market in Australia has seen massive growth in the past few years, currently being slowed by the increase in interest rates in Australia and globally. Mortgage rates are now a prominent topic in Australia, raising the question of how rent-to-own payments are calculated.

We calculate rent based on the home's purchase price rather than the market rates. This aligns much more closely with how a bank would assess you.

A bank calculates your principal home loan repayments based on the price you buy the home for. OwnHome does the same. That means when rent is high; your repayments won't jump year on year. We will always base your payments on our agreement which supports you becoming a homeowner.

What is OwnHome?

How does OwnHome's pricing work?

At move-in: Initial Payment

You make a one-time, upfront payment of 3% of your home's value to purchase the home. 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 at any time within the 2-7 year period you are with OwnHome.

For a $1,000,000 home, you'd pay just $30K upfront.

Each fortnight: Rent and Security Deposit

Building up your security deposit is simple because it's built into your payments, meaning it'll grow over time. About 35% of your fortnightly payments go towards your security deposit.

For a $1,000,000 home, that's about $500 per week in contributions to your security deposit.

Rent-to-own with OwnHome

Qualifying for rent-to-own is a newer financing option that allows aspiring homeowners to rent a property they plan to buy in the future.

How to qualify for OwnHome:

  • At OwnHome, we require a household income of over $180,000 in NSW and $150,000 in QLD.
  • People are willing to seek independent legal advice and consider whether OwnHome and a rent-to-own agreement are right for them. 
  • Savings - while you don't need the traditional 20% deposit, stamp duty and fees. At OwnHome, we have a 3% upfront fee, where 1% of this goes immediately into your security deposit, which comes off your purchase price at the end of the agreement.
  • A credit score of at least 600. If you currently have bad credit, you can contact us for a path forward—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.

Reasons to consider rent-to-own:

  • Negotiating with real estate agents is tough, OwnHome
  • We take care of upfront property taxes like stamp duty.
  • You don't need to apply for a home loan until after your 2-7 year period with us, and we will help you do so with any lender you choose
  • Flexibility and backing to know you can choose from most homes on the open market and have our experts help you along the way
  • OwnHome will guide first-time homebuyers throughout the process but given all of the same freedoms as someone applying for a typical mortgage.
  • No need for a considerable deposit/downpayment or no need to pay lenders mortgage insurance if you don't have it
  • Start building equity immediately, much like if you were paying a typical monthly mortgage payment.
  • Say goodbye to the life of a typical renter and the uncertainty that comes with that!

If you still want to know more, check out how rent-to-own works or if it's a legitimate way to buy a home.

At OwnHome, we help all customers navigate home purchases and get onto the property ladder without needing hundreds of thousands in deposit savings. If you're considering buying a home and want to learn more about rent-to-own, you can use the buying power calculator online.

Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not consider your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), target market determination (TMD), 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). Speak to a financial advisor about your individual circumstances. 

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