Doesn’t everyone dream of owning a house they can call their own?
To reach that stage of adulthood where one no longer has to pay the rent to live in someone else’s place.
However, financial realities often topple these dreams because not everyone can afford to buy a house.
That is why banks offer home loans; so individuals can buy their place and pay the mortgages in instalments.
But what about people who can’t qualify for such loans, such as people with bad credit history?
This is where the rent to buy house scheme comes in handy.
What is rent to buy house scheme?
Rent to own homes scheme allows one to rent the place they wish to buy with the option of purchasing it when the renting lease expires.
Such agreements make buying a house easy for many because the sale price is decided before signing the rental agreement.
Moreover, it allows first-time property buyers to purchase their place in a step-by-step process without needing to save up for a traditional deposit and the hassle of securing a loan.
Furthermore, this scheme will allow those with poor credit history to have a house of their own without the worry of loan eligibility.
With a pre-determined sale price, rent to buy house schemes can shield buyers from an inflated market in the future.
However, on the flip side, it can result in paying more than the market value.
How does the scheme work?
The rent phase and ownership phase are two phases in a rent to own homes Australia’s residents get into.
The former is where you pay the rent and the option fees, and the latter is the period after the lease expires where you buy the house.
When getting into such arbitration, you will come across two primary components of the scheme— the standard rental lease and the option to buy.
The first step is signing a contract with the seller that allows you to buy the property after the lease expires.
After the contract is signed, the initial deposit (ranging between 5-10% of the sale price) needs to be paid.
The rent to be paid is usually above the market rate. Some agreements may also require you to pay for the maintenance and repairs, stamp duty, and insurance costs. Besides the rent, you will also need to pay for the ‘buying option’ that acts as the house’s equity. Along with the deposit amount, this equity will be credited to you during the own phase.
What are the costs involved?
The costs involved in a rent to buy house agreement are variable, depending on the part of Australia, the house is located, and the market conditions at the time. However, as a general rule, buyers have to pay the rent and the ‘option’ fee every fortnight or week aside from the initial deposit.
Let us suppose you signed a 3-year lease agreement with a sale price of $500,000 and a deposit of $31,000. The rent is $700 per week with $150 for the equity. At the end of 3 years (156 weeks), you will have spent $132,600 in the renting phase [(700+150) x 156].
When the lease expires, you will need a home loan of 445,600($500,000 minus $31,000 deposit and $23,400 equity). This means, in the end, the property ends up costing you $609,200, as opposed to the valued $500,000. The estimate here does not include other costs you may need to incur according to your agreement.
Advantages and disadvantages
Advantages:
- With rent to own homes schemes, you don’t have to worry about home loans during the rental phase.
- Those with bad credit history can try to better the credit score to be eligible for a loan at the end of the lease.
- During the own phase, you will have built sizable equity.
- You can lock on your dream home without much worry about someone else bagging it.
Disadvantages:
- You will be paying rent well above the market value along with the equity instalment.
- You also need to have a significant amount for the deposit
- You stand to lose the deposit along with the equity and house in case of a default in payment.
- You still have to take out a home loan in the own phase.
Starting rent to own homes process
If you find the risk involved in the scheme acceptable to get into, here is how you can start the process.
- Step 1: Find a property that you wish to buy. You may find limited options due to the risks involved in the scheme for both sellers and buyers. Therefore, it may take you some time to find the right house.
- Step 2: Once you have found a property, get it evaluated and valued by professionals to know if it is a worthwhile investment.
- Step 3: Before closing the deal, you need to check up on the seller because their financial stability decides whether you get to purchase your dream home or not.
- Step 4: Yet another step before entering the agreement is getting a real estate lawyer involved to evaluate the contract and guide you through the process.
- Step 5: Once the deal is signed, it is time to make a budget and keep up with the rental and equity payments to keep the agreement alive.
- Step 6: At the end of the rental phase, calculate your approximate mortgage, and set out to secure that home loan.
- Step 7: The time is here. After years of getting into the rent to buy house agreement, you can finally call it your own.
Who is the ideal candidate for the scheme?
Wondering if you can enter a rent to own homes agreement? Here is an idea of the ideal candidate for the scheme:
- Individuals with a low credit score and cannot secure a loan.
- Creditworthy people who are not ready for a mortgage just yet.
- Those who cannot afford the down payments for a traditional purchase.
- Foreign buyers with little to no credit history in the country.
- Individuals with unconventional modes of income (e.g., freelancers, contract workers, and self-employed).
- Those who can afford the payment cycle of the scheme.
What are some problems that one can face?
If you are interested in the rent to buy house scheme, here are some problems you could potentially face:
- The seller could default on mortgage payments, leading to bank foreclosure and buyers to lose their right to property.
- Buyers could lose the deal if they don’t pay their rent and equity properly or cannot secure the purchase loan.
- Some parts of Australia require a mandatory stamp duty payment, while others have limits on lease option use.
Rent to buy a house: Is it for you?
Rent to buy house schemes are beneficial for those looking to start their real estate purchases at a slow pace. It is also fitting for those with poor credit history. However, with all the advantages comes the need to spend more money and risk losing all of it and the house over unexpected developments. Therefore, when considering this scheme, you need to decide how much you can spend and the risk you are willing to take.