For those struggling to enter the housing market, rent-to-own schemes present an alternative option.
Typically organised by property developers and aimed at those who have been knocked back for a traditional home loan, rent-to-own schemes, as they are otherwise known, allow buyers to rent a property before buying it. This can give struggling buyers the chance to gain a foothold in the market while still renting, and can allow them extra time to organise their finances.
However, despite perks, rent-to-own schemes also carry risk. Join us as we explain how the schemes usually work, as well as their pros and cons.
In this guide
What is rent-to-own?
Rent-to-own or rent-to-buy schemes are an alternative pathway to home ownership. Typically aimed at those who would like to buy a property but do not have enough funds for a deposit or cannot yet secure a home loan for other reasons, they allow the prospective homeowner to rent the house for a specified number of years before later having the option to buy the property at an agreed price. In most cases, the prospective buyer will also pay an extra fee towards the cost of the property on top of rent.
Who is it for?
Rent-to-own schemes usually attract the attention of those who are not suitable for a traditional home loan but want to make a move on the housing market. This could be due to:
- A low credit score. A poor credit history can make a mortgage applicant appear risky and make it more difficult to secure a loan. Get your score for free on Finty.
- Inadequate savings/deposit. Most lenders need to see a certain level of genuine savings before granting home loan approval.
- Unstable employment status. Self-employed and casual workers can sometimes find it harder to secure a mortgage and could be drawn to alternative pathways.
- High debt. A high level of pre-existing debt such as from a personal loan, car loan, or credit card can sometimes make it difficult to gain mortgage approval.
- Poor financial health. Poor spending habits, insufficient flow of income and a dwindling savings account can all be signs of poor financial health and could make it harder to get a home loan.
Participants in rent-to-own schemes are typically would-be owner occupiers who intend to rent and live in the property before finally buying it, as opposed to investors. However, you could live in a property first, and then use it as an investment property down the track.
How do rent-to-own schemes work?
Rent to own schemes work in two phases – the rent phase and the purchase phase.
All up, the process usually takes two to five years (although it can be longer). The process is complete once the rent period has ended and the tenant has financed and taken over ownership of the property.
To take over the property title, the tenant must be able to have their home loan approved at the end of the rent phase. If not, they may lose all contributions made.
- Usually two to five years.
- Tenant lives in the property while paying rent and non-refundable "option to buy" fees.
- In some cases, the tenant will also need to pay an upfront non-refundable deposit towards the house.
- Depending on the terms of the agreement, the tenant may also need to pay for maintenance costs, council rates and property insurance.
- Despite making financial contributions towards the property, during the rent phase the tenant has no legal rights of ownership.
- At the conclusion of the rent period, the tenant is given the option to buy the property.
- Tenant applies for a home loan to finance final purchase cost.
- Final purchase cost is the price agreed on at the beginning of the rent-to-own agreement minus any contributions already made (e.g. "option to buy" fees and/or deposit).
- Once settlement is complete the home is legally transferred into the new owner’s name.
- Begin living in the property before owning it.
- Lock-in the property purchase price at an agreed amount.
- Build equity and save while living in the property.
- Chance to build equity in a property and make a move on the housing market while waiting to be eligible for loan approval.
- Will usually have higher than average rent for the area and property type.
- Any deposit plus "option to buy" fees paid are usually non-refundable if you can’t (or choose not to) buy the property at the end of the rent phase.
- No guarantee of home loan approval at the end of rent phase. The developer/landlord does not offer any finance, and it’s up to the tenant to seek and get approval for a home loan.
- No legal ownership rights over the property until settlement, despite any contributions made.
- If the property developer/landlord gets into financial difficulties during the rent phase, the property may be seized by creditors, leaving the tenant with no home and no equity in the property.
What are the costs?
The costs involved in a rent-to-own scheme can differ depending on the value of the home as well as the terms of the agreement. The total cost typically includes:
Rent (weekly cost)
Paid weekly during the rental period (usually two to five years).
In some cases, the rent on rent-to-own properties can be substantially higher than the price paid for similar rental properties in the area. Prospective rent-to-own participants should carefully consider their options before entering any agreement.
"Option to buy" fee (weekly cost)
An extra fee on top of weekly rent that usually contributes towards the final purchase of the home. This can be as high as 50 – 100% of the cost of the weekly rent. While the total is typically deducted from the final purchase price, if the tenant pulls out of the agreement in many cases this payment is not refundable.
Deposit (one-off cost)
In some cases, a non-refundable deposit may be required to enter a rent-to-own agreement. Many choose to pay this via first home owner grants or with savings.
Building maintenance, council rates, home insurance (ongoing cost)
While usually the responsibility of the owner of the property, in some cases this cost will be passed onto the tenant, even though they are yet to buy the property. This responsibility can be checked in the terms of the agreement.
Purchase price (paid after rental period)
At the end of the rent period, the tenant will have the option to buy the home at the price agreed in the original contract. In most cases, they would have built up enough equity through extra payments to cover the deposit and may be eligible for a first-time-buyer home loan to cover the purchase price. However, the price stipulated in the contract may have been inflated.
Where can you find rent-to-own property?
Rent-to-own schemes can be difficult to find since they are not usually advertised on real-estate websites. Additionally, they can be controversial and are labelled "high risk" by some state governments, making their availability scarce.
They are also more common in capital city markets than regional areas. Those looking for rent-to-own schemes could try:
- Researching their local area through search engines such as Google.
- Asking property developers. Sometimes property developers will offer the scheme to a select number of owner-occupiers.
It should be noted that it is best practice to thoroughly research any rent-to-own scheme before entering an agreement and to seek professional legal advice.
Despite being touted as an alternative method of entry to the housing market for those knocked back for a traditional home loan, depending on your circumstances there may be other options:
Home loan approval through a non-bank or specialist lender
Some buyers may find it useful to seek approval through a non-bank or specialist lender. While the big banks often have stringent criteria, specialist and non-bank lenders can often be more accommodating.
Continue to save
Rent-to-own schemes can carry a price premium, with the average rent paid often higher than similar properties in the area and the final purchase price also inflated. Additionally, they also carry considerable risk. Given this, some buyers may find it more beneficial to continue saving while living in a standard rental.
Low deposit home loan
Usually available through non-bank or specialist lenders, buyers with only a small deposit saved may be able to apply for a low deposit home loan.