What you need to know about rent-to-own
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.
How does rent-to-own work?
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.
Rent-to-own schemes are available through specialist providers in Australia. However, individual property owners or landlords can negotiate a rent-to-own arrangement with a tenant at their discretion. Either way, getting independent legal advice from a solicitor or conveyancer is advised.
Who’s eligible for rent-to-own?
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 costs & fees
Property price
$600,000
Weekly rent to landlord (60%)
$626
Set up fee (2.5% of property value or $15,000)
This is a fee you pay to the rent-to-own company at the start of the agreement. It contributes towards your equity in the home, but you won’t get it back if you decide not to buy the property
Buyer’s agent fee (to acquire the property you choose)
$6,000 — you may not pay a buyer's agent fee if you choose a property within the provider's existing portfolio
Weekly contribution towards purchase (40%)
$417
Property price after 5 years (based on a fixed appreciation of 3.3% per year)
$756,863
Accrued deposit/equity
$188,789 (24.94% of purchase price)
Pros & cons of rent-to-own
Pros
- Lower-cost entry to homeownership (i.e. compared to the standard 20% home loan deposit usually required).
- You can live in and experience the property before you commit to buying it.
- You can build your credit before you apply for a home loan.
- You may be able to claim a portion of rental expenses or maintenance costs as tax deductions.
- If the property's value increases during the option period, you could potentially purchase the property at a lower pre-agreed price.
- There’s no obligation to buy after the option period ends under most rent-to-own agreements.
Cons
- Rents are higher to cover contributions towards the purchase.
- You lose both the property and the equity paid if you can’t secure finance or don’t use your option to buy.
- You still have to use a home loan to buy the property at the end of the rental contract.
- 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 decreases during the option period, and you've committed to
- Limited property choices.
Who is rent-to-own suitable for?
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.
How does rent-to-own compare to a home loan?
Deposit | |
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 | |
|---|---|---|
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 |
Is rent-to-own worth it?
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.
Mansour Soltani , Money's home loan expert
“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's home loan expert
Rent-to-own providers in Australia
Here are some of the well-known rent-to-own home providers in Australia. It’s important to research providers carefully before you commit.
- Home 2 Own
- Nicheliving
- PublicSquare
- OwnHome
Where is rent-to-own available in Australia?
- Greater metropolitan Sydney
- Wollongong
- Newcastle/Central Coast
- Tweed
- Greater Brisbane
- Gold Coast
- Townsville
- Canberra
- Select areas of Western Australia
