In the UK, government ‘Rent to buy’ programs are ways to help lower income households to afford to buy a home. In Australia ‘Rent to buy’ contracts offered by private vendors are very different arrangements and have even been banned by one state.
Table 1: Comparison 'Rent to buy', UK and Australia
| Conditions | UK | Aus |
|---|---|---|
|
Authorised government scheme |
Yes |
No |
|
Approved social landlord |
Yes |
No |
| Rent discount to market rate to let the tenant build a deposit |
Yes |
No |
|
Right to buy after specified time |
Yes |
Yes |
|
Financial loss to tenant if decide to not purchase the property |
No |
Yes |
|
Tenant covered by residential tenancy law |
Yes |
No |
|
At start of contract, state the value of the property at time of sale to tenant |
No |
Yes |
What is 'Rent to buy' in the UK?
In 2015 the UK government instigated a ‘Rent to buy’ program to encourage low income households to save money while they are renting so that they will have a sufficient deposit to put towards buying a home in several years time. As part of the program, the UK government offered £400 million in loans to housing associations and social landlords to build 10,000 new homes for potential lower income rent-to-buyers.
In September 2016 the ‘Rent to buy’ program transformed to be part of the Shared Ownership and Affordable Homes Programme 2016 to 2021.
Social landlords rent ‘Rent to buy’ homes to lower-income working households at a rent of up to 80 per cent of the local market rent in order to give tenants the opportunity to save for a deposit to buy their first home (either their rented home or another one if they want to).
The homes are offered at the reduced rent for a minimum of 5 years and let on assured short-hold tenancies for a fixed term of less than 2 years.
In 2015 the UK government instigated a ‘Rent to buy’ program to encourage low income households to save money while they are renting so that they will have a sufficient deposit to put towards buying a home in several years time.
If after 5 years of letting the landlord wants to sell the property the existing tenants have a right of first refusal. If the tenants don’t want to buy, the landlord can retain the property as rented housing (at either affordable or market rate rent) or sell it on the open market. If after 5 years (or longer if they choose) the tenants ask to buy their home the landlord is expected to agree to sell it ‘except in the most exceptional circumstances’. When the home is sold or moved to a market rent, the landlord will repay the UK Government grant.
The price for the home will be the market price at the time of the actual sale and not the price of the property when the home was first rented five or more years earlier. The buyers will need to get a loan from a bank to buy their home.
If after 5 years of letting the landlord wants to sell the property the existing tenants have a right of first refusal.
There are risks for lower-income tenants in that if house prices increase significantly then they may not be able to afford the mortgage on the property when it comes time for the landlord to sell or that the money they have saved towards a deposit is still not enough. In such cases, the tenants could have to find a new residence (albeit with a saved deposit).
How is 'Rent to buy' different in Australia?
In contrast, in Australia ‘Rent to buy’ describes a private vendor (i.e. non-government) scheme whereby a tenant pays rent and the costs associated with an option to buy the rental property in the future (usually at an inflated ‘future’ price to cover anticipated property price rises) from the vendor. The ‘Rent to buy’ contract requires the tenant to source finance from a bank or other mainstream lender so as to buy out the vendor at a determined future date.
A recent report from the Consumer Action Law Centre identifies that tenants are usually lower income households who are not able to get a loan from a mainstream bank or credit society because they don’t have a large enough deposit, can’t afford the mortgage repayments or have a poor credit history.
Of course, as the tenant was not able to satisfy the requirements of mainstream lenders in the first place they are very unlikely to get a loan when the ‘Rent to buy’ contract expires. As a consequence, the tenant forfeits all ‘option’ monies paid to the vendor, and often is evicted from the property.
The Consumer Action Law Centre report states that it ‘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.’
In fact, ‘Rent to buy’ contracts are illegal in South Australia, and the Consumer Action Law Centre recommends that they be banned across Australia.
‘Rent to buy’ contracts may also be known as ‘lease to own’ or ‘lease plus option’.