A ‘rent to buy scheme’, as colloquially called in recent media publications, is also known as ‘vendor finance’ or ‘instalment contracts’.
The concept is not a new one. The general purpose of the scheme is to provide incentives for a ‘tenant’ or ‘renter’ of a home, especially those people who find it difficult to save for a deposit or obtain traditional bank finance, to buy their own home. The documents under a ‘rent to buy scheme’ generally require the tenant to use part of their rent payment towards paying off the purchase price, in the aim of eventually buying the home.
In theory the concept sounds good, and various Australian state governments and individuals have engaged in this arrangement to make housing more affordable.
‘Rent to buy scheme’ — how it works
The scheme usually involves two elements:
- the tenant enters into a standard residential lease, at market rent, which allows the tenant to occupy the property and
- the tenant enters into a sale option, which allows the tenant to buy the property for a pre-agreed purchase price.
For example, the term of the contract is generally 2-5 years, and during that period, the tenant pays money under the sale option which can be credited against the purchase price for the property. Essentially, the tenant is accumulating a forced deposit of approximately 5% or 10% of the agreed price of the property. The theory is that once the period of the ‘rent to buy scheme’ contract has lapsed, the tenant will have a good track record of payments (creditworthiness), and the amounts already paid by the tenant towards the purchase price should enable the tenant to obtain a home loan from a bank for the balance of the purchase price.
The financial side
A tenant who is considering a rent to buy scheme should ensure that when the rent and sale option amounts under the contracts are aggregated, the total is close to what the standard loan repayments would be if the tenant were paying off a housing loan from a bank.
Risks involved with rent to buy schemes
Despite the often altruistic aims of rent to buy schemes, the tenant may have few legal rights if the arrangement goes wrong. It is important that the contracts are well understood, and tailored for each situation if necessary.
Some of the main risks for the tenant to be aware of under a rent to buy scheme are:
- Rent to buy contracts are high-risk schemes for buyers because the title of the property is not transferred to the buyer until after they have finalised the purchase of the property.
- In some cases, tenants may be paying above market rate rent or prices for the property, and will not have any ‘equity’ in the property until the full purchase price is paid.
- The rental period may last several years and, if a tenant’s circumstances change, the tenant may be unable to complete the payments. If the tenant fails to exercise his or her right to purchase the property, or cannot obtain a bank loan at that time, they may lose any payments they have made towards the purchase price.
- In some cases, a tenant may complete the rental payments in accordance with the contract, and still not be able to obtain a home loan. This may be the case if the price agreed under the contract is higher than the market price, or if the market has gone down since the price was agreed.
- Depending on how the scheme is structured, the tenant may not be eligible for first home buyers grants or stamp duty concessions which might otherwise be available to them.
- In addition to rent and the purchase price instalments, some rent to buy contracts also require the tenant to pay for repairs and maintenance, general rates, insurance or other outgoings. These costs may be substantial, particularly with an older or run down property.
- If the landlord fails to keep up their own bank repayments, the bank may have the right under its mortgage to repossess the property. In that case, the tenant may have a claim against the landlord, however, it can be costly and time consuming to prove the tenant’s case, and the landlord may not have the financial capacity to pay compensation.
What should you do?
If you are considering entering into a rent to buy scheme, get independent legal advice on the contract to ensure that you understand the nature of the binding agreement and the risks involved. With our knowledge and experience, we can negotiate the contract on your behalf to ensure that the contract is fair and in your best interest.
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