Get on the property ladder with a rent-to-buy option
(From the CBA Blog)
There’s a little-known way of getting a start in the property market that allows aspiring property owners to get a toehold in the market without having to save a sizeable deposit. It’s called rent-to-buy and it’s essentially a form of vendor finance. Here’s how it works.
Under a rent-to-buy agreement potential property purchasers have the right to purchase the property that is the subject of the agreement at any time during the contract term.
Increasing your options
A rent-to-buy contract comprises two parts. The first part is a standard residential lease that gives the tenant the right to occupy the property in question. The second part of the agreement is an option (in some states such as Queensland this is called a lease purchase option). The option gives the purchaser the right to buy the property at any point during the term of the contract – which is usually between five and seven years.
The price at which the property will be purchased is fixed in the lease option and the leaseholder pays an ongoing option fee to maintain the right to purchase the property during the term of the contract.
“Under a rent-to-buy arrangement the contract holder pays a weekly fee comprising two components, the lease and the option fee, which combines to equal an amount that’s equivalent to a home loan repayment,” says rent-to-buy specialist David Siacci.
Over time, part of the option payment gives the contract holder a certain amount of equity in the property, which financial institutions can consider when assessing the potential property holder’s eventual application to take out traditional finance to purchase the property.
“A lot of people have enough income to make the repayments on a mortgage but they don’t have the required deposit to buy the property. That’s where rent-to-buy arrangements come in. This gives people a chance over a five-year period to build up some equity and show the bank they have a proven payment record. People usually do some renovations and repairs on the property over the period plus the property usually increases in value over the term of the agreement,” he explains.
Applying for a loan
The contract holder can approach the bank at any time during the contract period for a loan to purchase the property, without incurring any penalties from the vendor. Plus, the purchase price is locked in at the time the initial rent-to-buy agreement is signed. But until then, the title of the property stays in the vendor’s name until the rent-to-buy contract holder obtains finance to buy the property.
“Rent-to-buy is a great way to set people up for home ownership when they have trouble saving a deposit but still want to enter the property market,” Siacci says.