Trying to purchase a home amid a cost-of-living crisis and stagnant wage growth is a near-impossible task, prompting a rethink of rent-to-buy schemes.

Rent-to-buy (also known as rent-to-own) is a leasing agreement that allows tenants to buy the property they have lived in at the end of the lease period at a previously agreed price.

How does it work?

Available in most parts of Australia, properties that belong to these schemes could be suitable for first-home buyers unable to secure the deposit just yet.

This scheme gives them the option to purchase when the lease expires, which is normally between two and five years.

Typically, in a rent-to-buy home, a portion of the rent goes towards building equity in the property so that the tenant gets on the property ladder by slowly building up their stake in the home.

Rent-to-buy operators that aim to level the playing field for both parties include Assemble Communities, PublicSquare. and OwnHome, which offers home loans for just 2.2 per cent upfront, covering the 20 per cent deposit.

Assemble completed a build-to-rent project in Melbourne’s Kensington last year, which meant residents could achieve home ownership despite a tough housing market.

Offering 199 apartments, the model allows residents to secure their rent and purchase price for up to five years with the option to buy their home at any stage at an agreed value.

A one-bedroom property in the development is at a fixed price of $550,000 until June 2026, with the rent-to-buy model recommending a household income of $84,000 to cover the rent of $577 per week while you save.

Further projects in Melbourne are under way in Brunswick, Coburg and Footscray.

Assemble’s completed project in Kensington, in Melbourne’s inner-north-west. Photo: Facebook

Path to own

Stewart Bunn from First National Real Estate describes the rent-to-buy model as an innovative response to the challenges of today’s housing market.

“It creates a creative pathway to home ownership for people who might otherwise struggle to enter the market, helping them build equity over time,” he said.

“While it’s not a solution for everyone, it certainly adds another tool to the toolbox for both buyers and sellers.”

Offering a gradual transition into owning a home, rent-to-buy is especially beneficial for first-home buyers or those with credit challenges.

“It allows people to use the rental period to improve their credit score, accumulate savings and prepare for a traditional mortgage application,” Bunn said.

“People also get the chance to experience living in the property, ensuring it meets their long-term needs before committing fully to the purchase.”

Who does it work best for?

Rent-to-buy provides a pathway to home ownership for first-home buyers or people with credit issues who might struggle to save a large deposit or those seeking to remediate their credit rating while they build their savings.

“It’s also a great option for long-term renters wanting greater stability and a chance to own their first home, and also people in transitional circumstances who may be facing temporary financial challenges or adverse life events,” Bunn said.

“For them, rent-to-buy offers the stability of living in a property while they work to secure traditional financing down the line.

Then, when you’re in a position to, you can apply for a mortgage from a bank to pay the outstanding balance.

Potential risks

Bear in mind that rent-to-buy agreements can require rent above the market rate.

Meanwhile, not all of the premiums paid may convert into future equity or down payment credits.

Aside from the rental payments, most contracts will also stipulate that the aspiring homeowner pays for repairs and maintenance, council rates, strata fees, property taxes and other costs, such as insurance.

Upfront option fees or other deposits are typically non-refundable, which means if the purchase doesn’t go through, those funds may be lost.

“These arrangements can involve intricate terms regarding building maintenance (which regular renters don’t need to worry about), repair responsibilities, and what happens if the buyer can’t secure financing, which may lead to disputes,” Bunn said.

Finally, if property values decline, rent-to-buy participants might end up overpaying compared to market conditions.

“Where lenders perceive uncertainty, buyers may still face challenges securing traditional financing when the time comes to complete the purchase,” he said.

Get advice

Bear in mind that some rent-to-buy providers have been found to charge exorbitant rent and fees, which led to Victoria introducing legislation that prohibited some types of rent-to-buy agreements.

Meanwhile, a study in 2016 by the Consumer Action Law Centre came down hard against rent-to-buy schemes, pointing to risks for buyers.

The key is to tread carefully.

Make sure you get an independent legal specialist to look over a rent-to-own agreement before signing on the dotted line.

Also, bear in mind that sometimes, the agreements can be pretty tough on the aspiring buyer, with a missed rental payment resulting in a broken lease agreement, putting the deal in jeopardy.

This article first appeared in View.com.au. Read the original here