A new report from the Consumer Action Law Centre (CALC), entitled Fringe dwellings: The vendor finance and rent-to-buy housing black market,
exposes the predatory lending practices of property spruikers.
“Vendor finance and rent-to-buy schemes promise the Australian dream of owning your own home—without a bank loan. However, these deals typically do not result in successful home ownership and in some cases financially destroy hopeful buyers,” the report said. These schemes typically target people who want to own their own homes but cannot get conventional loans from banks.
Buyers enter into tenancy agreements with spruikers, and the former is charged exorbitant rent under the guise of building equity in the home. The agreement also includes the option to purchase the property for a specific price after an agreed period, which is generally between two to five years. However, this price can be more than $100,000 greater than the market value of the home.
By the end of the tenancy agreement, buyers are caught in a quagmire as they’re unable to obtain finances for overinflated properties after having paid thousands of dollars in rent and fees.
Rent-to-buy schemes and vendor finance agreements
Under rent-to-buy schemes, the buyer agrees to an inflated property price and then pays market rent, an option fee to purchase the property in several years’ time, and in some cases, a deposit and outgoings. The option fees are at least partly credited to the purchase price. Eventually, the buyer must refinance with a mainstream lender to purchase the home by the time the rent-to-buy scheme expires.
Meanwhile, under vendor finance agreements, the buyer agrees to an inflated property price, then pays a deposit, instalments, outgoings, and in some cases, their First Home Owners Grant. These agreements generally range between two to 30 years, and the buyer often needs to refinance with a mainstream lender within several years.
People who’ve signed up for rent-to-buy schemes and vendor finance agreements will find it virtually impossible to refinance—mainly because they gamble on what their properties will be worth in several years’ time, which in many cases is far less than what they’d expected.
“Consumer Action has seen no examples of successful rent-to-buy deals. These schemes do not enable people who could otherwise not buy a property to achieve home ownership. They are extremely financially risky and the legal protections for buyers are grossly inadequate,” the report warned.
Gerard Brody, chief executive officer of CALC, is calling for major law reforms to prevent consumers from being swindled out of their savings by these predatory schemes. Particularly worrisome is the fact that a decade ago, the market for low-value, run-down housing sold for inflated prices was concentrated in remote areas of Victoria. Recently, the market has shifted to growth areas in outer metropolitan Melbourne.
“Looking at things like advertisements online for these types of schemes suggest that it may be very widespread,” Brody said.
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