Should You Consider a Rent-to-Own Scheme as a Path to Home Ownership?

For millions of Australians, purchasing a home will be the biggest investment they make. Most people take between 20-30 years to fully pay off their homes even after putting down a hefty down payment.

In an attempt to promote home ownership, some parts of the country are implementing rent-to-own schemes. 'Rent to own' refers to the process of paying your normal rent amount, part of which goes towards accumulating equity on the property. A pre-calculated formula is used to determine what share of your rent will actually go towards offsetting the price of the home.

The idea is that over a 20-30 year period, you will eventually accumulate enough equity to own the home. And if you decide to change your mind, you can cash in on the accumulated equity you've obtained over the years. But is there more to these schemes, and are they a suitable alternative to home ownership?

How rent to own can help you purchase a home

In many ways, rent-to-own has multiple benefits. First off, you don't have to come up with a large down payment amount for a mortgage. Most mortgages in the country demand a 20% down payment even before you can move into the property. Add this to the fact that interest rates can fluctuate significantly within a 20-30 year period.

Coming up with a down payment is a major reason why people are unable to purchase a home. With a rent-to-own option, you don't have the burden of a down payment amount. Instead, you pay the usual deposit (which is typically equivalent to one month's rent) that is required before moving into a rental property. You will then pay rent, and a potion of the rent will go towards accumulating home equity.

Some rent-to-own schemes are also not too strict on credit requirements. Even if you have a less-than-perfect credit score, you can get on the path towards owning a home.

What you should consider

You may be ready to jump on a rent-to-own scheme because of the numerous benefits involved. However, successfully owning a home using this path requires careful preparation. Note that the rent amount for such a property will be noticeably higher than the usual rent one would pay. This is because a share of what you pay is going towards accumulating equity.

Some rent-to-own schemes will have you lose out on accumulated equity if you were to miss just one rental payment. Therefore, you should be financially prepared to stay on course as you look to purchase the home.

More importantly, make sure a solicitor formalises all paperwork related to the rental agreement. This will reduce any potential conflicts that may arise due to a disagreement on the ownership path.