How rent-to-own homes work in Australia

Here’s how rent-to-own schemes work in practical terms:

1. Rental agreement

You sign an agreement with the property owner or rent-to-own provider that allows you to rent the property with the option to buy it at the end of the agreed rental period. The amount you’d need to pay to buy the property is set at the start of the agreement, according to OwnHome. There’s no credit score impact.

You move into the property and make regular rent payments, just like in a standard rental agreement. A portion of those rent payments (up to 40%) go towards the purchase of the home.

2. Option to buy

There's a specified period (usually between 1-5 years) at the end of which you can buy the property. This is called the ‘option period.’ You can buy the property at the end of the option period by taking out a home loan with a standard bank or lender. The equity in the property you have built up through the rental contributions essentially serves as your home loan deposit. If you don’t buy the property, you forfeit all contributions and equity.

The eligibility for rent-to-own is similar to a rental application and includes:

• Tenant/buyer must be over 18 years of age
• Must have sufficient verifiable income to cover rental payments
• Evidence of income (e.g. payslips, bank statements)
• A good credit score — typically above 660
• Valid government-issued identification documents (ID)
• Australian citizenship or permanent residency (or married or in a de facto relationship with an Australian citizen or permanent resident) at the time of purchase

Rent-to-own schemes can be a suitable pathway to homeownership for:

• First-home buyers who don’t have a large enough deposit to secure a home loan.
• People who need to improve their creditworthiness to qualify for a mortgage at a later stage.
• Buyers in high-demand areas who want to buy a property without competing offers.
• Self-employed individuals who may need to demonstrate their income over a sustained period before they can qualify for a home loan but want to build equity in a property in the meantime
• Foreign nationals or expatriates who plan to buy in an area but await permanent residency or permission to buy in Australia.

Rent-to-own schemes provide an alternative pathway to the property market without the 20% deposit (i.e. 80% loan-to-value ratio) usually required to get a home loan. But you’ll pay inflated rents throughout the contract, which can be up to five years.

Alternatively, you could save this amount yourself over that time and tuck it away in a high-interest account to build a deposit towards your dream home. You’d continue to build equity in the property once you buy the home and gradually reduce your loan balance.

It’s important to remember that with a rent-to-own home you won't own any part of the property until you secure a mortgage at the end of the option period and buy it outright. If you can’t secure finance for the property, you could lose both the property and any payments you’ve contributed. In some cases, you can request a sale of the property in the open market and potentially receive a refund for all contributions to date.