History of Vendor Finance in Australia
Although Vendor Finance is not new to Australia it is not widely used in comparison to the number of home loans that are financed through the banking system.
In the land boom years of the 1870s and 1880s, property developers subdivided land and sold the land to purchasers to build homes upon and to property speculators who purchased the land for re-sale. Property developers offered terms to sell the land, typically ¼ of the price as a deposit, ¼ after six months, ¼ after 12 months and ¼ after 18 months, with interest payable at 6% p.a. on the outstanding amounts.
By the early 1900s, the practice was widely used and accepted, with land in suburban locations such as North Sydney and Chatswood advertised for sale on terms.
Vendor Sales were entrenched in the common law of Great Britain, and as a British Colony, Australia inherited the British legal system by default.
The origins of vendor sales can be traced to the establishment of the land Titles registration system. By 1890, all Australian States had created a State registry of Land Titles, to issue certificates of title to land and to register all conveyance transactions.
This overcame the major difficulty in the use of Vendor Finance, Which was to provide proper security to the vendor for the payment of the price of the property. The aim of Vendor Finance was to enable a sale to take place, where otherwise it would not, because cash or other finance was not available.
In 1927 in the High Court if Australia. In the case of the federal commissioner of Taxation- v – Thorogood , the legality of Vendor Sales on Australian soil was established
At this time property exchanged title by a Vendors sale or vendors Terms Contract from the seller to the buyer. The average Australian at this time was unable to pay for their property in full and up front, a situation that has not changed today. Banks however did not lend money! They held it for safe keeping. As a result of this an agreement was made between the seller and the buyer. An amount was paid up front (the deposit) and the property was paid off over a specified number of years, and when the final payment was made the Title of the land was changed into the buyers name and registered with the Land Titles Office.
The use of Vendor Finance fluctuates according to social and economic conditions.
In the 1960’s, 1970’s and early 1980’s young couples would purchase house and land packages from builders, using terms finance. Generally after one year, the builder would cash out by transferring the Contract to a financier, who might then provide normal finance to the purchaser.
As the years passed and the banks realised that profits could be made by lending money to Australians for the purchase of their homes people began to turn to the banks for their finance. The old ways of purchasing property were superseded………………..
With the increasingly easy availability of mortgage finance from Banks and non- bank lenders from the mid 1980’s to date, due to the deregulation of the banking system, terms finance has been relatively rare. It was however used in sales by the NSW Department of housing during this period.
Recently a demand for terms finance has become apparent due to the fact that Banks and non-bank lenders insist on Mortgage Insurance for loans over 80% of the property valuation, and purchasers with blemishes on their credit rating or who are not salary earners are often refused mortgage insurance, and are therefore refused a loan.
In all states of Australia the use of an Instalment Contract is a legal way to purchase and sell property, With the exception of South Australia. In S.A. a different set of paperwork is used to achieve the same end result, to allow Australian families the opportunity to purchase their own home.
It is a system that is recognised officially in Australia. In the 2006 Australian Census, question 56 was Is this dwelling: Being purchased under a rent/buy scheme?