Although a less common way of getting onto the property ladder, rent to own can help buyers needing time to save for a deposit or to build up a credit history.
- Rent-to-own is a leasing arrangement that provides for the rental of a property for an agreed period, at the end of which, the renter has the option to buy.
- Especially appealing for young buyers who are unable to qualify for a bond in the traditional way, rent to own provides a window of time in which to build up both a deposit and a healthy credit history.
- Because tenants are renting with a view to one day owning the home, they are more inclined to keep it in good condition, which consequently benefits the seller.
“Is it better to buy or to rent?” The question is a common one. But what if there was a way to do both?
While it offers a less conventional way of getting into the property market, a rent-to-own agreement may be the route to go, especially for those buyers who need time to save for a deposit or to build up a healthy credit history.
ooba CEO Rhys Dyer explains how rent to own works and why it may be a good choice for first-time buyers.
What is rent to own?
“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 chance to buy,” Dyer 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.”
What is the appeal of rent to own homes?
There are benefits to be had from a rent-to-own scheme, chief among them for those who are unable to qualify for a bond in the traditional way. Dyer explains…
Help building a deposit
“To qualify for a bond, potential buyers usually need to have saved enough to put down a deposit,” he 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 your best financial alternatives.”
The “buy” or “sale” component of rent to own, 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’re 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 own 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 this is why the rent-to-own option is becoming increasingly popular in South Africa.
Benefits to the seller
He notes that rent-to-own 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 own 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 own may offer a viable alternative. Dyer advises buyers considering this route to first consult with an experienced home loan consultant: “ooba, South Africa’s largest bond originator, has a team of qualified brokers who will take you through all your options and help you find the best deal to suit both your circumstances and your pocket.”
To make the home-buying process that much easier, South Africa’s leading bond originator offers a range of home loan calculators, including those that determine bond affordability and bond repayments.