How To Use Rent As Your Deposit
There are two main ways you can use your rent as a deposit. The first is a rent to buy arrangement with the owner of a property and the second is using your rental history with the bank to form a part of your deposit (on paper). I will analyse these two methods in more detail in this article.
One of the biggest issues many first home buyers and investors have is that they can afford the repayments but they have trouble saving their deposit because a lot of their money is going towards rent. (ideas on saving your deposit).
Many banks and lenders have come to realise that someone who pays their rent on time and consistently is also highly likely to pay their mortgage on time and consistently. In the same way that people who own their properties through owner finance can use their payment history to get a mortgage renters can now use their payment history to boost their borrowing power.
Using Rent as Proven Savings With Lenders
Almost all lenders in Australia require you to provide ‘proven savings’ – this is a step by step increase in your savings account that has been held for a minimum of 3 months.
Without this proven savings it is very difficult to get a home loan unless you have or are given the full 20% deposit for the property.
However, if you want to get a 95% loan then it is a must have.
New home loans on the market such as the RAMS rent saver loan will allow you to combine a 5% deposit (obtained through a gift or any means) with a strong proven rental record. The rental record then acts as your proven savings.
Many other banks and lenders are also giving potential customers this option. I recently spoke with St George Bank and they had this loan option available also.
- You generally need to have been renting for a minimum of 6 or in some cases 12 months
- You need to have paid your rent on time for every single payment
- You may require a rental contract that for 12 months or more
- Private rentals are only accepted on a case-by-case basis. Via a licensed real estate agent is preferred
- Tenants on the lease must be the same as those borrowing the loan
Rent To Buy (Literally Using Rent As Your Deposit)
A rent to buy option is a contract you enter into with the owner of a property.
You decide to rent to property for a certain amount which is usually above the current market value for that property. A portion of your rent then accumulates towards the deposit for a property. You then have the option to use this money as a deposit to purchase the property.
Usually two individual contracts are drawn up
- A rental contract
- An option to buy contract
Let’s say market value rent is $300/week. You then agree to pay $500/week with $300 going towards rent and $200 going towards an ‘option to buy’ deposit.
After 2 years you would effectively have $20,800 of a deposit to use to exercise your option to buy. This can only be used on that one property and if you decide not to buy then you forfeit any money that is going towards the deposit.
The Pros of Rent to Buy
- You can lock in the purchase price for the property while you are saving your deposit
- You have a clear savings plan
- There is a major cost to you not saving forcing you to pay the rent + deposit
To Cons of Rent to Buy
- If you opt not to purchase the property you lose any money put towards the property
- The deposit can only be used on that particular property
- Maintenance is usually required to be paid by you, where in normal rentals the landlord pays for this
- If the owner goes belly up you are not protected and you risk losing everything
- Often a ‘strike price’ is agreed upon. This is the expected price of the property when you plan to action your option. If the property does not go up in value to this ‘strike price’ it makes financing almost impossible
Rent to Buy deals do not always fall in the favour of the renter and are probably not the ideal way to use rent as a deposit. Be very cautious and get professional advice before entering into any rent to buy agreement.
No Deposit Loans with Rent As Deposit
No deposit loans (even with rent as the deposit) simply don’t exist in today’s market unless you get someone to go guarantor on your loan.
This may be a parent or relative who agrees to pay either the full loan or an agreed percentage of the loan (usually 20%) if you default on the loan. This is almost always secured against another property the guarantor owns.
So unless you have a guarantor you will still be required to have a minimum 5% deposit plus money for the closing costs (eg. Stamp duty).