- Rent-to-own agreements are an alternative way to enter the housing market
- However, they are complex, and can be risky
- If a lease payment is missed, their equity is at risk - tenants are disadvantaged
Rent-to-own schemes are growing in popularity as housing affordability continues to worsen, but Pitcher Partners Newcastle and Hunter Partner Scott Edden says the inherent risks may outweigh the rewards.
Properties in Newcastle, Lake Macquarie and the Hunter Valley continue to be snapped up in the blink of an eye and at astronomical prices, with momentum continuing to build after values surged by more than 30% in 2021.
Most remarkably, the soaring property demand and subsequent price rises are a first in the region for more than 30 years.
To put the situation into perspective, first home buyers’ 20% deposit has increased by an average of $42,000 and monthly loan repayments rose by $700 on average over those three decades.
Those in the region struggling to break into the market have begun taking a vested interest in rent-to-own agreements in the hope of finally achieving the great Australian dream.
Not so simple
At first glance the scheme is simple; those struggling to secure a mortgage can rent a property with the opportunity to purchase it at the end of the residential lease agreement.
This is achieved by tenants making higher payments on their rental property to build equity and to prove to lenders that they are capable of servicing a loan.
Many enter these agreements with rose coloured glasses and are unaware of the disadvantages and risks.
In reality, the scheme is complex and riddled with risk, so much so that it is currently banned in Victoria and South Australia (with the exception of the South Australian Housing Authority (SAHA).
A prominent disadvantage for tenants is that the purchase price of the property is negotiated and locked in years in advance.
The agreed price of the property is calculated based on expected inflation over the period to the agreed future purchase date.
It could be argued that this is a positive in a market where the median property price in the region is $860,0001 and only rising, leading tenants to assume that they are securing themselves a ‘bargain’.
However, should a downturn in the housing market occur, renters could end up overpaying for the property, possibly impacting their borrowing capacity with their financier.
This could also impact future return on the property as tenants would have to wait for an upturn in the property market to break even or make a return on the residence – ultimately affecting their ability to capitalise on their investment.
Additionally, payments are generally higher than usual rent rates as they cover both rental payments and equity raising that is needed to purchase the property.
The average rent in Newcastle sits around $530pw and adding a further 2-7% on top of this puts tenants at risk of serious financial strain, contributing to higher anxiety and overall lower quality of life due to a lack of spending money.
Many fall into the trap of thinking rent-to-own agreements are trustworthy due to them being a lawfully binding contract, although if tenants fail to seek legal and accounting advice during this process, they may be at threat of losing it all.
Tenants disadvantaged
Contracts generally do not favour tenants, particularly if they choose to withdraw from the agreement due to a change of mind, their inability to secure a mortgage, or a change in circumstance where they may need to move residence due to work commitments.
In this instance they are at jeopardy of losing their hard-earned equity and the additional fees paid to enter the agreement, especially if they did not have the clauses of the contract altered to include the return of their deposit.
Tenants hold no legal rights over the property as the property title is only transferred into their name once they have made their final lease payment and they have secured a loan.
Therefore, if a lease payment is missed, then they are at risk of losing their equity and their contract.
Additionally, there is the possibility that the property is tied into the current landlords’ debts, endangering the security of the home as the property is at risk of being seized in the instance of missed loan repayments.
The best way to overcome the trickery of rent-to-own agreements is through seeking professional legal and accounting advice prior to signing any agreements.
Seasoned professionals will be able to guide you through the process, advocate in your best interest, advise on the pros and cons of the agreement and provide an independent recommendation as to whether or not the scheme is right for you.
Housing affordability is sure to remain a hot topic in 2022, with an upcoming federal budget surely to target the spiralling housing affordability issue, although it is currently unclear whether severe intervention will be implemented to cool the market.
In the meantime, it is important that those wanting to break into the market do not let their desperation sway their judgement.
Rent-to-own agreements feast on people’s vulnerabilities, the schemes are riddled with threats and put tenants at a severe disadvantage of losing their money, time, and the roof over their head.
It is important to seek professional advice prior to entering into an agreement, while also taking into consideration the great risks involved including paying high rent rates, losing equity if a loan cannot be secured and the possibility of losing the home due to the landlord’s inability to pay their own debts.
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Disclaimer: This article contains general information and should at no time be considered financial advice to the reader. The reader should always verify their situation with their financial advisors before taken any further steps.
