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Rent-to-own or rent-to-buy is an alternative pathway to homeownership with no deposit. It allows you to rent a home but with the option to purchase the property at a predetermined price at the end of the rental period (delaying the need for a mortgage).
Rent-to-own schemes are a relatively new model in Australia and are only available in select east coast areas via specialist providers. Victoria has banned certain rent-to-buy contracts and vendor finance schemes. In South Australia, only the South Australian Housing Authority (SAHA) is legally permitted to offer rent-to-buy options.
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:
The rent-to-own costs vary depending on the model, provider, property, and contract terms. Here's a standard cost modelling to buy a $600,000 property via the rent-to-own platform PublicSquare to give you ballpark figures.
Pros | Lower-cost entry to homeownership (i.e. compared to the standard 20% home loan deposit usually required). |
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Cons | Rents are higher to cover contributions towards the purchase. |
Pros | You can live in and experience the property before you commit to buying it. |
Cons | You lose both the property and the equity paid if you can’t secure finance or don’t use your option to buy. |
Pros | You can build your credit before you apply for a home loan. |
Cons | You still have to use a home loan to buy the property at the end of the rental contract. |
Pros | You may be able to claim a portion of rental expenses or maintenance costs as tax deductions. |
Cons | The tenant is responsible for maintenance and repair costs which is not the case if you’re renting a property the conventional way. |
Pros | If the property's value increases during the option period, you could potentially purchase the property at a lower pre-agreed price. |
Cons | If the property's value decreases during the option period, and you've committed to purchasing it at a higher previously agreed-upon price, you may incur a financial loss. |
Pros | There’s no obligation to buy after the option period ends under most rent-to-own agreements. |
Cons | Limited property choices. |
Pros | Cons |
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Lower-cost entry to homeownership (i.e. compared to the standard 20% home loan deposit usually required). | Rents are higher to cover contributions towards the purchase. |
You can live in and experience the property before you commit to buying it. | You lose both the property and the equity paid if you can’t secure finance or don’t use your option to buy. |
You can build your credit before you apply for a home loan. | You still have to use a home loan to buy the property at the end of the rental contract. |
You may be able to claim a portion of rental expenses or maintenance costs as tax deductions. | The tenant is responsible for maintenance and repair costs which is not the case if you’re renting a property the conventional way. |
If the property's value increases during the option period, you could potentially purchase the property at a lower pre-agreed price. | If the property's value decreases during the option period, and you've committed to purchasing it at a higher previously agreed-upon price, you may incur a financial loss. |
There’s no obligation to buy after the option period ends under most rent-to-own agreements. | Limited property choices. |
Rent-to-own schemes can be a suitable pathway to homeownership for:
Deposit | |
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Rent-to-own | Lower initial costs (1-3% of property value) |
Home loan | Requires a larger deposit (up to 20% of property value) |
Ownership | |
Rent-to-own | You start as a renter with the option to buy later |
Home loan | Immediate ownership upon purchase |
Building equity | |
Rent-to-own | A portion of rental payments go towards equity |
Home loan | You build equity from the start as your loan balance reduces |
Repayments | |
Rent-to-own | Rental payments are fixed each week or month |
Home loan | You can structure your home loan repayments to suit your financial situation & refinance when needed |
Flexibility | |
Rent-to-own | You have limited flexibility to make changes to the property during the rental period |
Home loan | You can rent out or make changes to the property at any time |
Purchase price | |
Rent-to-own | Agreed-upon price based on estimated future value |
Home loan | Purchase price is dictated by current market value and supply and demand |
Rent-to-own | Home loan | |
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Deposit | Lower initial costs (1-3% of property value) | Requires a larger deposit (up to 20% of property value) |
Ownership | You start as a renter with the option to buy later | Immediate ownership upon purchase |
Building equity | A portion of rental payments go towards equity | You build equity from the start as your loan balance reduces |
Repayments | Rental payments are fixed each week or month | You can structure your home loan repayments to suit your financial situation & refinance when needed |
Flexibility | You have limited flexibility to make changes to the property during the rental period | You can rent out or make changes to the property at any time |
Purchase price | Agreed-upon price based on estimated future value | Purchase price is dictated by current market value and supply and demand |
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.
“While rent-to-own schemes can offer price stability by fixing the sale price at the start of the rental period, they can also work against you if there's a market downturn. That’s why you still need to do your due diligence on the property and area you’re buying into. In the long run, property values generally appreciate, but short-term fluctuations do occur."
Mansour Soltani, Money.com.au's home loan expert
Here are some of the well-known rent-to-own home providers in Australia. It’s important to research providers carefully before you commit.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
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