Aussie the giant Australian home loans specialists, recently published the following article on their blog:
How do Rent To Buy schemes work?
While they offer a different way to get on the property ladder, rent to buy or rent to own schemes won’t be for everyone.
Rent to buy is a type of vendor (or seller) finance, where the owner of a property provides finance to the buyer. Sound a bit backwards? Some experts think it is and warn against it, however if the vendor is willing it becomes another way to enter the property market without having to buy something upfront or go through traditional lenders for finance.
Just as they sound, rent to buy schemes are like renting a property, but you may pay a bit more in rent with the additional amount going towards potential home ownership at a future agreed date.
The property needs to have a renting or leasing contract, which outlines the market rent and basically allows you to live in the property. This will also likely include an agreed time frame of how long you want to rent the property for.
Then there’s the buy or sale component, called an option deed or option, which allows the tenant to buy the home and move into a mortgage agreement at the end of the lease term. Often an upfront option fee will need to be paid, plus additional ongoing option fees which are on top of the agreed rental payments.
These fees help the buyer build up a deposit, so at the end of the rental period they have a smaller balance to pay on the agreed price of the property if the purchase goes ahead. However if it doesn’t, the fees will be kept by the vendor. The normal rental payments don’t go towards the sale as they’re covering the landlord or owners
Typically, the price of the property is agreed upfront so any increases in value will be to the buyer’s benefit in capital gains, which is meant to offset the option fees being non-refundable.
Combining the rent and option fees shouldn’t cost you more than a typical mortgage would if you had bought the property initially. Depending on your credit history, employment, assets and other liabilities, these regular payments might also help you build up a good track record of payments to help you qualify for a loan from a traditional leader.
Before entering into this type of scheme it’s important to seek professional financial and legal advice.
What do you think of rent to buy schemes? Would you consider buying property this way? Let us know by leaving a comment here.