In today’s article, we’ll be discussing what it is to rent-to-own, also known to others as rent-to-buy.
We will look into the benefits of renting to buy, where one can find rent-to-buy properties and understand what happens after one moves into the property.
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What is rent-to-own & how does it work?
Let us first begin by defining what it is to rent to buy. Renting to buy is an alternative lease agreement that allows the tenant to rent for an agreed period before getting the option of buying the home. Rent-to-buy may offer a viable alternative for those who cannot buy a home the traditional way. The ‘buy’ or ‘sale’ constituent of such a lease is also known as the Option Deed, which would describe the changing of the agreement into a bond when the lease ends.
Rent-to-own is a great option for those with a low credit score. Despite it being an unconventional way of obtaining property, renting to own is a viable way to improve your credit history and build up the necessary funds for homeownership.
Read: How to get a loan with a low credit score
You might be asking yourself, how this is possible? The rent-to-own method gives the tenant more time to work toward improving their credit score before applying for a home loan.
What credit score is needed to buy a house in South Africa?
The minimum credit score for a home loan in South Africa is (Six hundred forty) 640. A score of 600+ will give you a fair chance of home loan approval. A score of (six hundred seventy) 670+ is an excellent credit score, increasing your chances of a home loan approval.
Read: First Time Credit Card User: Is it a good or bad idea to have a credit card?
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Benefits of rent-to-own:
Another great benefit of renting to own is the cost involved. Payments are spread out, making it more affordable for a person with a tight budget. As part of the rent-to-own agreement, one will make regular rental payments, an additional upfront option fee, and ongoing option fees. These option fees will go towards building up a deposit. Which ultimately brings down the total purchase price if the sale goes ahead. However, option fees could be forfeited if the sale does not go through.
Read: How to improve your financial literacy skills
Of course, rent-to-buy is not without its risks, until the transfer of the home goes through, the prospective buyer’s name will not appear on the property’s title deed, leading to less security for your investment.
Things one should consider before agreeing to a rent-to-own arrangement?
- There is always the financial risk should the seller choose not to sell the property.
- Consider your medium to long-term financial position. When your financials are bound to improve in the future you won’t need a rent-to-buy agreement.
- When you find a better home or neighbourhood, it will be difficult to change your mind because you are already committed to a long-term contract.
- You do not own the property; therefore, you are limited when it comes to making additions or renovating the property.
Advantages of rent-to-own
- Rent to buy provides enough time for any person who will want to better their finances to pay the deposit and legal fees involved.
- Rent to buy allows you to rent while you increase or better your credit record.
- The purchase price of the property is fixed at the beginning of the agreement, meaning that the seller/landlord cannot change the price of the property should the market conditions change.
Disadvantages of rent-to-own
- Renting to own is expensive because you are liable to pay for your rent and additional fees.
- With a lease, the tenant can expect to get what he pays for – a month of staying on the property. But when one opts for a rent-to-own agreement it automatically becomes a long longer-term agreement. If an owner fails to pay the home loan or any other obligations, they could lose the right to the property and end up erasing the tenant’s interest, as well.
- Future Financing Risk, rent-to-own agreements require a tenant to make monthly payments for the right to buy that property in the future. However, the tenant might not be able to get a loan in the future. They could end up losing the extra money they had been paying and their right to purchase.
How to find rent-to-own homes?
Buyers considering the rent-to-own route will need to consult with an experienced home loan consultant.
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What is the purpose of a bond originator?
The bond originator acts as the intermediary between the home loan applicant and the banks, assisting the applicant in compiling one set of paperwork, then submitting it to all the major banks on their behalf. This also allows you to compare deals and choose the one with the best interest rates.
Bond originators in South Africa
BetterBond, Ooba, and MultiNET Home Loans are among the biggest originators in the country, they have a team of qualified brokers who are able to assist you through all the available options and help you find the best deal that suits both your circumstances and your pocket.
What happens once I have moved in?
According to Ooba’s statistics, it takes an average of 69 working days for your bond to go from grant to register. The only action required on your part is to pay the relevant costs and sign the transfer documents and the bond documents.
We have established that rent-to-own arrangements are an alternative financing tool that could make it easier for renters to transition into homeowners—assuming the individual terms and conditions make good financial sense. Like anything else, it is very important to read the fine print and fully understand what you are agreeing to before committing to a long-term contract.
With that said, rent-to-buy can give first-time homebuyers enough time to save for a deposit and improve their credit before making the purchase. It is very important that one know their credit score and what’s on their credit report.
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