Rent-to-buy emerging as a new path to home ownership, but is it worth it?
Rent-to-buy emerging as a new path to home ownership, but is it worth it?
11 October, 2022
Many renters would be nervous about putting a nail in the wall, let alone a pool in the yard.
But Andrew Robertson has signed no ordinary contract.
"We've bought the house but not bought the house," Mr Robertson said.
The Gold Coast father has entered a rent-to-buy agreement, meaning if all goes to plan, he will one day own his home.
If he had gone to a bank, Mr Robertson would have needed a deposit of around $150,000 to purchase the house at Pacific Pines.
Instead, he paid around $36,000 to one of two rent-to-buy companies that have launched in Queensland in the past year.
"It's been fantastic for us," he said.
"Trying to save up and rent at the same time — the way the property market keeps rising — it's quite hard to keep track of where you need to get to.
"We would have aimed for a certain amount of deposit for a certain property, but by the time we got there, that deposit required for that property would be higher again."
An academic warns that the rent-to-buy model, billed as "new path to home ownership", is risky because prices are locked in regardless of how the market behaves.
"Buyers need to be very conscious of what they are signing up for," Professor Shaun Bond from the University of Queensland's business school said.
How do rent-to-buy contracts work?
As the name suggests, you rent a home with the option to eventually buy it.
The companies buy the property, and the customer pays them a smaller than usual deposit.
In Mr Robertson's case, the up-front fee was 3 per cent of the house's agreed value.
The customer then pays an ongoing fee, a bit like rent but also covers utilities. Part of that fee is saved as equity in the home.
Once enough equity is accrued, the customer gets a regular home loan, and the property title is transferred to them.
James Bowe, the co-founder of OwnHome, said the model is designed to allow people to save for their home while living in it.
"What you are doing is locking in the price that you can buy that property back," Mr Bowe said.
Dean Arnold, the founder of PublicSquare, said the agreement was like a "forced saving mechanism" that would help buyers get into their own homes "up to 10 years earlier".
"We like seeing our customers building up at least 2.5 per cent a year in equity, which means by year four they have 10 per cent equity ready and they can get onto a traditional mortgage," Mr Arnold said.
What's the catch?
If the property market goes down, you could end up paying more for the house than its worth, Professor Bond warned.
Under the contract, the agreed price of the property increases each year — with OwnHome, 3.8 per cent per annum.
"Prices are actually starting to fall again so buyers need to be very conscious about locking in future price increases when we are clearly past the peak," Professor Bond said.
But Mr Bowe said historically prices have always increased in the long term.
"We certainly don't have a crystal ball on how property markets are going to play out," he said.
"What we have seen over the past century is that there's never been a seven or 10-year period in which house prices have ended up lower than they were at the beginning of that seven to 10-year period."
Mr Arnold admitted a downturn, or rise of less than 3 per cent a year, would be a "financial downside" for customers.
He said however that his company's customers were in it for the long haul.
"They're not really thinking about what's the market going to do over three or four years," he said.
"They're thinking about I'm going to live in this home for 10 to 20 years.
"Historically it's been a pretty safe bet that the market will go above the three per cent [per year] that we charge."
Mr Robertson said based on the historical prices in his suburb, he was not "overly concerned" about prices falling.
"But it's obviously in the back of your mind," he said.
How do the payments compare to regular renting?
"They're quite a bit higher," Mr Arnold said.
"But imagine if you were serious about building $100,000 or more in deposit within 10 years, you're going to have to save hundreds of dollars per week on top of rent."
Mr Robertson said his ongoing "rent-to-buy" payments were less than the rent he was paying previously.
"For us in that respect, it's not any different financially, except this time we're going towards our own home rather than someone else's mortgage," he said.
Mr Bowe said his company's ongoing charges included water rates, council rates, maintenance, and repairs.
"We're taking care of all of the things that you typically expect your landlord to be taking care of," he said.
Comparatively, Mr Arnold said that under his company's leases, the tenant paid for maintenance costs.
"It's just deducted from the overall deposit that they build up. This also allows them to potentially do some renovations on the home as well," he said.
"They don't need to wait until they exercise the purchase option to improve their home with renovations, and add value to the house."
Professor Bond said it was important for customers to remember that they do not own the property during the lease period.
"It's possible that they might not qualify for a mortgage at the end of their time period," he said.
"If house prices fall once again, that banks might be reluctant to provide a loan at the price that was previously agreed."
OwnHome and PublicSquare said they carried out the same credit checks that the banks did.
"We want to make sure that when we put [potential buyers] into one of our homes, they are going to be ready to switch to a traditional mortgage and meet all the requirements of those lenders," Mr Arnold said.
Professor Bond said another major risk was if the rent-to-buy provider ran into financial difficulties.
"If they default on their payments, that property could be foreclosed upon by their borrower and the renter and the intended purchaser would have no claim," he said.
"That could leave the potential buyer on the hook."
Mr Bowe said OwnHome was backed by a major bank.
Anyone considering such a contract should seek independent legal and financial advice, Professor Bond added.
"Unfortunately there's been a lot of concern that some of these schemes in the US tended to exploit low income individuals," he said.
"I'm not saying companies in Australia have a similar model but some of the history of these products give rise to concern.
"There have been versions of this [in Australia] offered by small landlords in the past.
"We can't point to many successes where this really has been instrumental in helping people."
OwnHome and PublicSquare said they had each received 3,000 applications from Queenslanders.
"We're going to try and fit as many people as possible, but there's definitely a waiting list at this point."
"There's 270,000 renters in Brisbane that are more than capable of making the payments or equivalent payments for a mortgage and who overwhelmingly don't have access to the bank of mum and dad," Mr Bowe said.
"That's increasingly becoming the deciding factor in whether you're able to break free from the rental trap."
Professor Bond said the rent-to-buy model could suit new immigrants.
"Someone's just moved to Australia, they've got a great professional job, but they don't have much credit history here," he said.
"This type of scheme might be an alternative for someone in that situation."
Professor Bond said it could provide more certainty for tenants, who are often booted from their homes when rising prices prompt landlords to sell.
"They may actually have some security of tenure for a longer period of time than a traditional rental has provided them with," he said.
Professor Bond said those organised with their finances may be better off saving for the full deposit while living in a regular rental.
"Set a goal for themselves over a three to five year period where they're going to set aside money to work towards their deposit."