What are rent-to-own home schemes?

Rent-to-buy (RTB) scheme, also known as rent-to-own scheme, is a leasing agreement that gives renters the chance to buy a home at the end of a fixed rental period (usually three to five years). 

The idea of it is to help aspiring property owners enter the property market by removing the need to save for a traditional deposit and begin living in their dream home.

While this particular pathway to homeownership is not very common in Australia, these RTB schemes have grown in popularity in America.

How do rent-to-buy schemes work?

RTB schemes have two main parts to them: a standard rental agreement and an option to buy. That means that the home you live in is treated as a normal rental property until the end of the lease, where you can choose to buy the house at the price established at the start of the agreement.

Keep in mind, while you may be thinking about owning the property down the line, during the rental period you don’t own any part of the home. Also, the rental fee might be higher than your typical lease agreement, because you will be paying an option to buy fee.

The real owner of the property is the RTB business, who buys several properties and then offers it to aspiring homeowners as a RTB scheme.

The Rental Phase

Renting a property through a RTB scheme is like your typical lease agreement. The scheme typically requires you to pay a non-refundable deposit, which new home owners can pay using the First Home Owners Grant. This deposit will be deducted from the total price of the house when your lease ends. 

You pay rent like you normally do, with the option to buy fee. That fee may be 50-100% of the weekly rent, which will eventually add up to the additional deposit you’ll need to purchase the property. Be aware that you may lose the money paid towards these fees if you decide to not purchase the property.

Some schemes will also require you to cover the costs of building maintenance, council fees, stamp duty and insurance. That’s right, even if you don’t officially own the home you may find yourself paying for things like the official homeowner.

The Buy Phase

At the end of your rental contract, you’ll need to get a home loan from a lender. The cost of your home would have been established at the start of your leasing agreement. The deposit and option to buy fees will be deducted from the original price, and you’ll be expected to pay the rest.

Risks and Benefits of Rent-to-Buy

A major downside of RTB schemes is that you do not own the property at the start, but you are expected to cover the costs as if you did. This means that if you fail to meet a rental payment (which includes the opt-to-buy fee) you may run the risk of having the agreement terminated. You also run the risk of losing the property if you are unable to secure a home loan at the end of your lease period (along with all the extra payments you made towards it).

However, since the price of the home is secured at the start of the contract, if housing prices go up your home will stay the same price as in the agreement. This means you may get your home cheaper than the price it’s worth. But you run the risk of the reverse scenario happening as well. 

On the positive side, an RTB scheme can let a first time homeowner get their foot in the property market quicker: you rent the house you want to live in and get the chance to buy it down the line.

If you’re thinking of buying a new home, look through Mozo’s home loan guides to figure which path to property ownership is best for you.