Tony Cordato is one of Australia most respected Vendor Finance lawyers. Here is how he explains how you can use this strategy to buy a home without having the huge upfront deposit required by the banks:
Deposit Builder – the new vendor finance strategy
The highest hurdle home buyers face to owning their home is saving up a deposit.
Governments in Australia offer First Home Owner Grants to help first home owners with the deposit. ASIC on its Money Smart website has three pages of advice to home buyers on saving for a home. A case study that catches the eye on the Money Smart “Saving for a Home” website is Case study:
Penny saves her deposit.
Penny set herself the goal of buying her apartment in 4 years’ time. She looked at her budget and identified several ways to save for her deposit. She opened a high-interest online savings account and arranged for a proportion of her salary to go into it each fortnight. She also reduced her expenses by cancelling her gym membership, cutting back her mobile phone bill and limiting herself to one dinner out a month. After 4 months she had saved $4,000 so she rewarded herself with a dinner at her favourite restaurant. In 1 year she saved almost $13,000 and after 4 years she had over $56,000 for her deposit.
What is the problem with that advice? It solves one problem – saving for the deposit, but is not an all-round solution.
Where does Penny live for the next four years? And more importantly, what rent will she be paying, will the rent go up, and how many times must she move house? And will the deposit she saves be enough deposit for her dream home or apartment, if prices rise over those four years?
Wouldn’t it be wonderful if there were an all-round solution?
There is! – It’s called Deposit Builder with Licence to Occupy.
Here is how it works:
Step 1– Find a house. An investor, friend or relation might have a house they are willing to sell with the deposit builder method. The price is full price because vendor finance is offered.
Step 2– Agree on a delayed settlement period. How long will it take for the buyer to pay a 10% deposit by instalments? The time could be up to four years, which is far longer than the normal settlement period under a Contract for Sale. This is why it is called a delayed settlement contract.
Step 3– Agree on the deposit instalment payments. There will be a lump sum payment on signing the contract followed by regular payments until the full 10 % deposit is paid. There is no interest payable – this is not a credit contract. The deposit is paid to the seller, not into a trust account.
Step 4– Early Occupation. The buyer moves in straight away and pays an occupation fee which is like rent, but is not rent. Lawyers call this fee a licence fee and the occupation arrangement a licence to occupy. In NSW, Vic, and WA, the licence to occupy can be a document on its own or can be a clause in Contract for Sale. In those States, council rates, water rates, water usage, strata levies and insurances premiums can be passed on to the buyer. In QLD, TAS and the ACT, a standard Residential Tenancy Agreement is used to document the licence to occupy. Outgoings cannot be passed on in those States.
Step 5– The balance price is paid. The buyer is pre- qualified by a mortgage broker before they sign the Contract so that after four years, they should qualify for a 90% loan from a home loan lender.
They’ll need 90% if the value has not risen. If the value of the house has risen 10%, then they will need only an 80% LVR loan to pay out the balance price payable under the contract.
The deposit instalments, the delayed settlement and the licence to occupy can all be inserted as
clauses in a standard Contract for Sale.
In NSW, QLD and by application in VIC, the seller’s liability for land tax passes to the buyer the
day they move into occupation.
Stamp duty is payable on the contract in the normal time periods. This is as little as 30 days in
QLD and WA, 3 months in NSW after the Contract Date, and not until on or after settlement in
VIC or TAS.
This strategy is not available in SA because there are more than four instalment payments.
The title to the property remains in the name of the seller until the whole price is paid.
The price, the deposit instalments and occupation fees do not rise and fall according to changes
in interest rates. However, the occupation fee can be increased by CPI increases or by a fixed
In summary, you can now see why this is a more attractive solution for Penny’s problem than the
solution ASIC provides, and a solution which may allow Penny to continue her gym membership!
Anthony J Cordato
Cordato Partners Property Lawyers