How new 'rent-to-buy' start-up works - and the risks involved By TODAY
A rent-to-buy scheme offering first buyers an opportunity to break into the housing market has earned the backing of the Commonwealth Bank.
However, it's not without its pitfalls.
Today money expert Effie Zahos explains how rent-to-buy property start-up Own Home works.
"The idea behind the rent-to-buy scheme is that you pay your rent and a bit of that rent goes towards going into that equity so you can buy that home in the end," she said.
"In this particular case, there's a few assumptions and agreements you have to make.
"They actually buy the home on your behalf. They cough up the deposit and stamp duty."
Effie said people then pay a higher than normal rent but 2.5 per cent of that goes into building equity.
"They assume the property grows by 3.8 per each year and that's what you're going pay it off if you want to buy it afterwards," she said.
"You should have enough equity there in just around five years to actually go in and get refinanced and buy the house yourself."
Effie recommends people do their own calculations to see what the property will cost them.
"Let's say you're looking at a house for a million dollars... Your initial cost is $25,000 because they make your money from a starter fee, which is 1.5 per cent of the house," she said.
"Plus you've got to put in $10,000 in your kitty to start saving.
"Then after five years, what they assume, because of that growth, that value in the house is $1.2 million.
"Your total outlay over five years is $411,000. Now, that includes your savings there."
Effie recommends people do their own calculations to see what the property will cost them.
"Let's say you're looking at a house for a million dollars... Your initial cost is $25,000 because they make your money from a starter fee, which is 1.5 per cent of the house," she said.
"Plus you've got to put in $10,000 in your kitty to start saving.
"Then after five years, what they assume, because of that growth, that value in the house is $1.2 million.
"Your total outlay over five years is $411,000. Now, that includes your savings there."
"I crunched the numbers and thought 'let's say I have a five per cent deposit', your outlay will be less but you need so much money to jump into the property market.
"So they're tailoring this to people who have good income and can afford to just keep paying these rental (payments) but don't have the deposit.
"The biggest problem with affordability is getting that deposit (and) your lender's mortgage insurance. That's the case here."
Effie said the scheme, which is only available in certain areas, is not for everyone and people need to do their research.
"I would exhaust all my other options, I would get legal advice," she said.
"You really are taking a gamble here as to where property prices are going because if it doesn't grow that amount you are still committed to that."
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