Property prices in Australia's capital cities are rightly cooked and a whole generation is struggling to muster up enough savings to put down a deposit on a home. In an attempt to alleviate some of that, rent-to-buy schemes have become increasingly popular in recent years. Here's what they are and what you should watch out for.
What is a rent-to-buy scheme?
A rent-to-buy, or own, scheme is a payment plan designed so you can move into a property you intend to buy and pay it off as if it was a rental. While the schemes vary, many will allow you to enter a standard tenancy with the option to purchase later on. How these schemes make money is usually through charging a higher rental rate than the market, which will often go toward the final big sum if you decide to go ahead with the purchase.
The major problem with these schemes is that many prospective buyers could pour money into a property, at a higher weekly rental rate, only to be booted from it after a default payment or two. On top of this, depending on the contract you sign up for, rental prices and the final sum can fluctuate depending on supply and demand in the market. The price you sign up for initially might not be the final figure you look at.
Are rent-to-buy schemes legal in my state?
While some schemes could work out well for those wanting to buy into the property market, there have been a number of issues as well leading to more legislation and regulation around them. The South Australian government strongly recommends its citizens from buying into these schemes due to the fact they're often such high risk.
"Any contract that requires the payment of part of the purchase price for a property, other than a deposit, isn't legally binding in South Australia," the government warning reads. "This means that if you have signed a rent to buy contract you may be able to take the matter to court to try and recover some or all of the payments you have already made."
Similarly, the WA government warns the schemes are high-risk and could leave renters with no claim to the property if they default on a single payment.
The reality is, while governments and some property experts warn about the riskiness of such a transaction, the legislation surrounding it is quite vague from state-to-state. In 2016, a Melbourne man challenged a rent-to-buy scheme in court after he struggled to make payments and had no property title to fall back on, according to an ABC article.
A 2016 report by the Consumer Action Law Centre detailed the vague legislation related to these schemes highlighting concerns people, like the Melbourne man, could be left in dire situations.
"Gaps in the law can leave people with limited or no legal protections if things go wrong. The effectiveness of legal protections varies depending on the people involved and the nature of the transaction," the report outlined.
"This legal uncertainty, coupled with a lack of independent legal advice, is why the risks of these schemes are so significant, particularly for buyers."
So, while the schemes might sound appealing for those desperate to get into the housing market, it's very much a tale of proceed with caution (and plenty of legal advice).
Are rent-to-buy schemes worth it?
Every scheme is different with different contract conditions and catches. Ultimately, that decision is up to you but it's strongly suggested you look into the fine print, ask a legal expert and weigh up some important questions such as, what happens if I default on a payment? and do I get any money back if I decide not to proceed?
In some cases, it might just be safer and cheaper to do it the old-fashioned way — a dreaded mortgage.
Keeping on top of your budget is easier said than done - particularly when a big chunk of each pay cheque keeps going towards rent. But maybe you're spending more than you need to be. Here are the average rental prices in each state and territory in Australia. If you're paying heaps more, it might be time to think about moving into a new neighbourhood.