Buying a home without a bank is easy!

This kind of transaction is called “vendor financing” and is commonly used in the commercial property sector, as well as by everyday home-buyers.

In a vendor-financed transaction, the seller acts as your lender. So instead of having to borrow money from a bank to fund your purchase, the vendor effectively ‘loans’ you the money by delaying the date when you have to hand over the purchase price. Your home loan repayments are paid to the vendor instead of a bank and cover a rate of interest as well as a component of the loan principal (just like a bank!).

This type of arrangement works very well for those homebuyers to whom the banks would not normally lend money, such as business owners, contractors and self-employed people, or those who simply have a low deposit amount and want to get on the property ladder immediately instead waiting to save up a larger deposit amount.

How long does the vendor-financed arrangement last?

Most vendors want to finalise the sale of the home within around three to five years, whereas some vendors are happy for the arrangement to go on for many years. The vendor-financed contracts are structured to encourage the buyer to build up enough equity in the home through repayments or capital growth to the point where they can re-finance the loan with a bank and finalise their purchase of the home from the vendor.

Do I still need a deposit?

Yes you do. The deposit amount is usually lower than what a bank would accept, with the exact amount dependent upon the value of the home, the weekly payments you can manage and whatever you can negotiate with the vendor. A higher deposit amount presents a lower risk to the vendor, so repayments may be lower.

How much are the repayments?

The repayment amounts are about the same as those that a bank would charge.

What contracts do I have to sign?

The contracts used consist of a standard residential tenancy agreement that covers your stay in the home until you complete the purchase, and an option agreement that gives you the right to buy the home at a particular point in time in the future. These two contracts dictate your relationship with the vendor and cover all of the repayments and costs, and secures your tenure in the home. Because the transaction is documented in a contract and legally binding, both parties are protected so there are no unpleasant surprises. For example, the vendor cannot change their mind and kick you out of the house.

Is this legal?

Yes it is. This kind of arrangement is common in the commercial property sector. Your legal rights as a tenant are covered by your residential tenancy agreement under the Qld Residential Tenancies Act, and your option to purchase the home is covered by your option contract and Australian contract law.

Are there any other costs involved?

Yes. The buyer also has to pay insurance, rates and utilities on the property. Repairs and maintenance may be the responsibility of the seller or the buyer, depending upon the nature of the problem. Typically, the vendor would be responsible for major structural issues with the buyer responsible for everything else.

As the buyer is looking to own the property at some stage in the short to medium term, the onus is on the buyer to maintain and care for the property. Because the buyer will one day own the home, any value that they can add through renovations or additions adds to their own equity. For example, let’s say a buyer chose to completely renovate the home and added $100,000 to the property value. Because the property price is set when the option contract is signed at the start of the agreement, this uplift in value belongs to the buyer, not the seller. The contracted purchase price doesn’t change.

What are you looking for when you look at our application?

Because the vendor is extending you credit, we carefully look at your financial history. In particular:

• Your employment record – we want to see that you have been gainfully employed for an appropriate period of time and that you earn enough money to cover the repayments. For self-employed people such as contractors, we would want to see your earnings from the business to make sure that you make enough money to cover the required repayments.
• Your rental record – we check your rental references to see if you are a good tenant that pays rent when it’s due and take good care of the home that you live in.
• Your credit history – we do check your credit history to make sure that the vendor has a good chance of completing the home sale with you.

Having said all that, rent to buy arrangements are designed for people who cannot get finance from a bank, so our pass rates on the above checks are not as strict as a bank!

What are the benefits of this type of transaction?

• The buyer gets to lock in the purchase of a home at today’s prices. Any capital gain that occurs after the contracts are signed belongs to the buyer.
• The vendor will typically accept a lower deposit amount than what a bank would normally require.
• Because of the lower required deposit amount you can get into the property market sooner, which can be a real bonus if property prices are increasing in your preferred area.

What are the risks of this type of transaction?

• The purchase price does not change once the contract is signed. If there is any uplift to the property value, this is a benefit to the buyer. Conversely, if there is a drop in the property value, the buyer wears this loss.
• If the buyer defaults on the contract by not paying the required weekly amount, the option contract can be terminated and the vendor may be entitled to keep some, or all, of the deposit amount. However if you do miss some payments there is always the opportunity to make them up before any action is taken.
• You don’t get any of those fancy (and expensive!) loan add-on’s that a bank would offer, such as a redraw or off-set account.