Although a less common way of getting onto the property ladder, rent-to-own can assist buyers who require time to save for a deposit or to build up their credit history.
ooba Home Loans CEO Rhys Dyer explains how rent-to-buy works and why it may be a good choice for first-time buyers.
“Rent-to-own or rent-to-buy schemes are effectively leasing arrangements which provide for the rental of a property for an agreed period of time, plus additional payments, and at the end of a set time, the renter has the opportunity to buy”, he explains, adding that the schemes allow buyers – usually those unable to save a deposit and secure traditional financing – to “get into a home” without substantial upfront costs.
“The property needs to have a rental or leasing contract, which outlines the rental amount and basically allows you to live in the home,” he says. “This will also likely include an agreed time frame for how long you want to rent the property.”
- Help building a deposit
“To qualify for a bond, potential buyers usually need to have saved enough to put down a deposit” Dyer says, adding, however, that 100% bonds are not unheard of, and buyers should also consider this option. “A qualified bond originator will help you decide on your best financial alternatives”.
The ‘buy’ or ‘sale’ component of rent-to-buy, called the option deed, allows the tenant to buy the home and move into a bond agreement at the end of the lease term, he continues.
“Often, an upfront option fee will need to be paid, plus additional ongoing option fees which are on top of the agreed rental payments. These fees help the buyer build up a deposit, so at the end of the rental period, they have a smaller balance to pay on the agreed property value if the purchase goes ahead” he says, noting that this can be especially helpful for young home buyers.
“However, if it doesn’t, the vendor will keep the fees. The normal rental payments don’t go towards the sale as they are covering the landlord or owners”, he explains.
- Improve your track record
“Typically, the price of the property is agreed upfront so any increases in value will be to the buyer’s benefit in capital gains, which is meant to offset the option fees being non-refundable,” says Dyer.
“Combining the rent and option fees shouldn’t cost you more than a typical bond would if you had bought the property initially,” he adds.
“Depending on your credit history, employment, assets and other liabilities, these regular payments might also help you build up a good track record of payments to help you qualify for a loan from the bank when buying a house at a young age.”
What’s more, rent-to-buy also gives you the freedom to back out of the deal whenever you want, and it won’t affect your credit rating at all. “This is possible because you will be treated as if you were involved in a normal rental agreement,” Dyer explains, adding that therefore the rent-to-own option is becoming increasingly popular in South Africa.
3. Benefits to the seller
He notes that rent-to-buy can also be beneficial to the seller. “You constantly hear from landlords that their tenants are messing up the property, thus incurring high maintenance costs. However, if you are renting the home with a view to one day owning it, you’ll be far more inclined to keep it in a good condition.”
Of course, rent-to-buy is not without its risks, among these the fact that, until the transfer of the home goes through, the buyer’s name is not on the property’s title deed so there’s less security for your investment.
However, for those who cannot buy a home in the traditional way, rent-to-buy may offer a viable alternative. Dyer advises buyers considering this route to first consult with an experienced home loan consultant.
Whether you opt for the rent-to-buy approach or not, we give you the best chance of acquiring a home loan by submitting your application to multiple banks. This also allows you to compare deals and choose the one with the best interest rates.
Article originally published on ooba