Skip to main content

Are Rent-to-Buy Schemes Effective?

With the Perth property market now more competitive than ever, ideas that may help would-be homebuyers get their foot on the property ladder are attracting renewed attention.

We investigate rent-to-buy schemes – can they help aspiring homeowners out of the tight Perth rental market?

What is a rent-to-buy scheme?

Rent-to-buy schemes (also known as rent-to-own) are designed to let prospective home buyers lease a property while they save to eventually buy it. Both the rent and the purchase price are usually fixed at the start of the agreement, which tends to run for between two and five years. A new version of rent-to-buy that has emerged in recent years is the ‘build-to-rent-to-buy’ scheme, where the home to be purchased is built especially for the purpose.

How rent-to-buy schemes work

Rent-to-buy schemes, which are usually offered by property companies and developers, generally include a rental agreement with a separate option to buy. Aspiring homeowners typically need to pay rent (often above market value) plus an extra fee for the option to buy the property down the track. The money paid for the option to buy is usually deducted from the final sale price. Home buyers will still need to take out a mortgage at the end of the rental period to buy the property.

The pros of rent-to-buy schemes

  • Time to save. The main attraction of rent-to-buy schemes is that they give aspiring homeowners time to save up a deposit and secure a home loan.
  • A locked-in purchase price. In a rising market, having a set purchase price for your property can shield you from house price rises and give you certainty about how much you need to save for your deposit and borrow for your mortgage.
  • Test before you invest. By renting and living in a home before you buy it, you know exactly what you’re getting and are less likely to be unpleasantly surprised by the property or what it’s like to live there.
  • Start paying down the purchase price. Some rent-to-buy agreements allow the tenants to start paying down the property’s purchase price, which means you can get ahead from the beginning.
  • You might not need perfect credit. Because rent-to-buy tenants don’t own any part of the home until they’ve made their final payment, sellers tend to be more willing to enter into rent-to-buy agreements with buyers with bad credit than a bank is likely to offer them a home loan.

The cons of rent-to-buy schemes

  • The property’s value could drop. The problem with a locked-in purchase price is that it’s locked in. That means that even if the market has experienced a downturn since the contract was signed and the property is now worth less than it was, the aspiring buyer has to pay the agreed price anyway.
  • Higher rents. The option-to-buy fees tend to increase your living costs when you’ve committed to a rent-to-buy scheme. These fees are typically between 1 and 5% of the purchase price. Some rent-to-buy contracts also require the would-be buyer to cover repairs, maintenance, stamp duty and insurance.
  • You have no equity in the property. Until you’ve made your final payment, your name is not on the title, and you don’t own any part of the property. This means you might be vulnerable to eviction if you can’t pay your rent, for example. Some rent-to-buy agreements have been known to include a clause that says that the buyer loses all the payments they’ve made, and they have no claim to the property if even a single payment is late. It’s important to make sure you understand what happens if something goes wrong, such as the owner going bankrupt or the property being repossessed by the mortgagee before you enter into a rent-to-buy agreement.
  • You still need to get approval for a home loan. At the end of the rental period, you’ll need to organise and get approval for a mortgage just like any other home buyer. Make sure you know where you’ll stand if finance isn’t granted before you commit to a rent-to-buy agreement.

Rent-to-buy schemes can be risky for sellers, too. Sellers can lose out if the property increases in value over the course of the agreement. Rent-to-buy plans are like an extended settlement period, and sellers may have to find another buyer if the tenants can’t or don’t buy it at the end of the rental period.

Want more?

As with any property purchase, it’s important to seek independent legal and financial advice before entering into a rent-to-buy scheme.

Looking for advice about renting or buying in Perth? Get in touch with our expert local team today.

Related Posts

How To Make Your Rental Property More Sustainable

At Rentwest, we’re passionate about sustainable living. That’s why we’ve d…

Read More

Perth Property Market: What To Expect In 2024

It’s official: Perth is Australia’s top-performing property market. In the 1…

Read More

How Perth’s Evolving Skyline Is Changing The Way We Live

Over the past few years, Perth’s skyline has been transformed, especially by r…

Read More
  • Where should we send your copy?
  • Please view our Personal Information Collection Statement

  • This field is for validation purposes and should be left unchanged.

  • Where should we send your copy?
  • Please view our Personal Information Collection Statement

  • This field is for validation purposes and should be left unchanged.

Close Menu