Hi all,
I'm currently renting but was looking into other options as there seem to be a few different ones out there I just wanted to get some input on some options and see what your experiences were with Rent to buy, buy assist etc.
Thanks all
Alternative house buying options, rent to own?
pyro love bird on 15/02/2022 - 13:33
Comments
Thanks so much for the link, looks like rent to buy isn't a great option. What do you recommend is an acceptable amount in cash to have before applying for a home loan from the bank? I'm also looking at purchasing a property with someone as recommended by another comment below, but we would both be first home buyers meaning that one of us would lose out if we go ahead with it. Do you have any advice with how we should tackle this?
What do you recommend is an acceptable amount in cash to have before applying for a home loan from the bank?
That's a bit of a "how long is a piece of string" question tbh… depends on how much the property is you're looking at buying? Let's say $750k for example - you'll need $130k:
- $75k deposit
- $10k LMI
- $40k stamp duty
- $5k misc govt fees and other fees (conveyancer, house inspection, etc)
If you can save more deposit then you can reduce LMI, but hovering just above 10% is the sweet spot compromise if that's not viable (as many lenders will also hike interest rates for <10% deposits too).
I'm also looking at purchasing a property with someone as recommended by another comment below, but we would both be first home buyers meaning that one of us would lose out if we go ahead with it.
First assess if the houses you are looking at are even in the price range for the first home owner's grant. If they're above the threshold anyway then that's that.
If you both trust each other and one of you has enough income on paper to service the loan, you could just have the loan and property on that person to preserve the "first home owner" status of the other person.
Be very careful with rent to buy.
If a traditional lender won't lend you the money to buy, and some other party effective lends you through a rent to buy structure, it means 1. they will protect themselves (from you defaulting/not exercising the option), 2. they will rip you off with the price to buy and effective interest rate.
Think about loan sharks, or pay day lenders. Borrowers from these lenders can't borrow from banks and turn to them and pay exorbitant interest rates and get into a vicious circle of debt.
Everyday analogy: say you want to buy a new car costing $20k outright. Traditional leasing companies let you lease the car at say 10% p.a. You can't afford it so you consider a rent to buy agreement for $25k at 15% p.a. over the next 5 years. You'd be better off just leasing the car.
Finally, if it's a struggle for you to buy, definitely don't try to buy or enter into agreements to buy in this very overheated market.
Even if you think you can manage with the rent to buy agreement and will be able to exercise the option, make sure you know how to value the call option you've purchased, including assessing the range for each parameter. If you've got no idea what I mean, they drop this idea.
It looks like the whole rent to buy thing is a bit dodge, I appreciate you taking the time to explain it, I think that option is out the window now.
What do you think about the Buy Assist program? It looks like there's also a government run version of that as well where they cover 25% of the value of the home, that would mean that I don't need to save for the full deposit but I'm not sure if there are any catches with that one. There's just so much information out there and I'm unsure with what's relevant/reputable information.
Thanks in advance
If you can't go down the traditional route this should only be a last resort.
Very often the equivalent interest rate it significantly more if you rent to buy. As in will add 5+ years to your mortgage - especially if interest rates go up.
I'd hunker down for an additional year.
House prices are unsustainable as they are when an entire generation can no longer afford to do anything but service their mortgage.
Rising interest rates will quickly put out the FOMO fire.From what I've heard, the market is looking like it's going to go back up as our borders re-open and people moving to the suburbs etc.
I just didn't want to miss the opportunity to buy at a reasonable price, so I've only just started looking at all the options for home buying. What do you recommend as a reasonable amount to have in cash as a deposit before applying for a home loan?
The investors will only come as long as houses with negative gearing return more than banks/share markets.
WA faulted back in 2016 and investors bailed
Once you get rid of the fomo you get rid of the stupid prices
Unless you want to pay off a 1 bedroom unit for the rest of your lifeAlso let's not forget we were in a recession prior to the pandemic pump and dump
A lot of rent to buy I see is basically renting but rent is about what you'd be paying + saving of a deposit + cut for the company, and they typically have a agreed increase of housing price (so purchase price still increases while you wait). Then at the end (say 5 years) you apply to a normal bank lender or else risk losing something.
Some brokers might have better ideas, but off the top of my head, with little money:
Buy a new apartment in the outskirts of your city in somewhere like NSW to get $10K grant (usable for deposit) + no stamp duty (first home). You'd need like $20k of your own to start which with the $10k grant makes $30k stamp duty. And you'd need good servicing.
Buy with others, unfortunately I think this will be the future of property purchasing. Buying a property with a friend, family, some mates etc. Its becoming the only real way many can afford the costs involved :(. Again you can start at around $20k -> $30k each person.
There's also some dodgy stuff regarding paying with credit and it not showing up, etc (you'll need to prove genuine savings still) plus finding a bank that would even be open to this. They're also both super risky, IMO I probably would never recommend this ever if it wasn't for that fact that for many, you probably won't have any choice besides investing in lotto tickets :/.
If you can, I'd go for saving until you have the minimum good deposit required, even better if you can stay with family to get away with paying rent.
Sounds like rent to buy isn't a great idea.
When you say saving until I have the minimum good deposit, how much do you mean?
I'm looking at purchasing in VIC and I'm looking for a house unfortunately as an apartment won't be large enough. I have someone that I can buy with, but we would both be first home buyers meaning that one of us would lose out on the first home buyers grant if we are both on the application. Chances are that we'd have a better chance with both of us on it won't we?
The dodgy thing regarding paying with credit is probably something I'd like to avoid if possible. Unfortunately staying with family isn't an option so I'll have to continue paying rent :(
However you cut it, you need to understand that a rent to buy or similar scheme will always cost you more than the traditional lending method.
The primary difference is that in the first you don't need to have saved a deposit (other than relatively nominal set up fees), whereas in the second you typically need 20% to avoid increased costs such as LMI.
The rent to buy situation is only good for the participant if they believe that despite the increased costs, they will still end up better off over the period of the arrangement because they benefit from capital appreciation that might otherwise cause their purchase to be "even further" out of reach if they continued their current arrangements while attempting to save the deposit.
The big risk carried by the participant, beyond the risk that the capital appreciation doesn't eventuate, is whether they will be able to secure "traditional" finance at the end of the period to buy out the rent to buy operator. This will be a function of many things including how much equity the scheme allow you to accumulate, your ability to continue to save additional funds that may/will be necessary to top up the equity already accumulated, the value of the property at that time, and your loan serviceability at that time. It's on these point that people could really come a cropper.
I wasn't sure how much more it would cost as I am paying rent anyway at the moment I thought it might be better to be putting that money towards owning a home but it looks like it isn't a good option after all as it's significantly more expensive and it sounds like it would be a lot of hassle.
The 20% that you mentioned, would that be 20% cash, before I apply for a home loan to avoid the increased costs?
Short answer, yes. And that is 20% plus costs including stamp duty which means in reality it's closer to 25%.
Some lenders will offer no LMI at lower amounts and in any event the greater deposit you have, the lower the LMI costs will be.
As some have mentioned above, depending on your circumstances you may be eligible for a government grant that can top up your deposit and/or you may be eligible for no/reduced stamp duty, but these are dependent on your specific circumstances.
https://www.ozbargain.com.au/node/681860
Tl;dr: Rent and save for a deposit, then do the "traditional" route. Rent to buy is so much more expensive and has so many gotchas - they are capitalizing on buyer FOMO and/or their lack of discipline in saving.