On 20/12/2018
Rental options for purchase may seem like an alternative to the property, but they can be extremely risky.
So risky, in fact, that it is illegal to rent to buy in the state of South Australia. The Consumer Action Law Center also recommends that rental schemes for the purchase be illegal throughout the country.
Why are these schemes so risky and why do people continue to practice them? Let's first see what it means to sign a lease to buy.
These types of contracts are also referred to as "lease-purchase", "lease option" and "packing". They are popular with buyers who are unable to obtain financing from a lender for a home loan. Instead, the buyer finds a house that is sold as "rent to buy".
The buyer must apply and pay an upfront payment before moving in. Buyers then move in and pay their rent up for a period of time, about five years, before creating enough equity to buy the house as of right.
For example, the weekly rent could be $ 600, including $ 400 for rent and $ 200 for home equity. Once the equity in the home is sufficient, the buyer then asks for a home loan from a lender.
Benefits of rent to buy
Leases are usually for people with low incomes or people who are struggling to get a loan from a traditional lender. On the surface, these contracts seem to be an opportunity to get in the door of homeownership.
In fact, many people use the first grant granted by the owner when entering into a hire-purchase scheme. The purchase price being set in advance, you know theoretically how much you will need to borrow in order to apply for a loan.
While these factors may give the impression that capital leases are reasonable, there is a high risk if things do not go as planned.
Disadvantages of rent to buy
For starters, most sellers are not interested in hire-purchase contracts; they prefer to sell the house directly. This means that the choice of rent to buy houses is much smaller than the standard market.
Rents for the purchase of a dwelling are usually new housing or located in areas where the value of the property does not increase according to state or national averages. This increases the risk for buyers as they could end up with a home that is not worth the potential purchase price.
Capital leases are not regulated as standard home purchase contracts. Buyers are not protected by the National Credit Code and could lose their homes in many ways.
When you rent to buy, you do not own the house during the rental phase. If you make a late payment, you can invalidate the contract and lose all the money you have already paid. In addition, if the seller defaults on his mortgage, the lender could repossess the house and you would lose any payment.
If you rent for the purchase because you had trouble getting a home loan, you are not off the hook. After the initial rental period, you will still need to get a home loan to buy the rest of the property. If your situation has not changed, you may be denied a loan, which means, you guessed it, that you are losing ownership.
If all this seems risky to you, it's for a good reason: the Consumer Action Law Center reported in October 2016 that it had "seen no example of successful lease purchase agreements".
Questions to Ask When Examining a Lease for Purchase
Still thinking about a lease? Here are some questions to ask.
How much of the rent is allocated to the constitution of the equity and to what amount does it correspond to the rent?
Am I responsible for paying the housekeeping and council fees?
What happens if I make a late payment?
Are there any fees associated with the contract?
Read the terms of the contract carefully to understand the issues. It is also wise to obtain legal advice before entering into a rental agreement.
Alternatives to Leasing to Purchase Contracts
People usually rent to buy because they can not get a home loan. This could be due to insufficient income, the impossibility of providing a substantial deposit or a lack of documentation; for example, if you are self-employed.
While it's difficult to get a home loan in such situations, some lenders offer non-traditional home loans. These include low-documentation home loans, low-deposit home loans and even low-income home loans.
Potential borrowers who can not obtain a loan because of their poor credit history may have an interest in focusing on establishing their credit. Once they have increased their credit score, they can go back to the possibility of buying a home.
If you can not afford the cost of mortgage payments but have a deposit, you can even consider buying an investment property and renting it. This is an option for people who want to access the real estate market but can not afford to live in the property.
You dream of entering the real estate market, but you are not sure of the rent to buy contracts? Before making risky decisions, look for a non-traditional mortgage loan. These can meet your needs and provide you with consumer protection that can reassure you.
Disclaimer: The views expressed by the contributors do not necessarily reflect the opinion of Your Investment Property.
Interest rates are at their lowest for more than 50 years, there are excellent rates available. The best thing to do is to compare the rates of all the lenders. Let us help you solve this problem – Compare home loans now
