I have written previously about a claim about a Census question supports the legitimacy of rent-to-buy transactions. In this post I’m considering the claim that “even the banks are suggesting rent-to-buy”.
I don’t claim that ‘rent-to-buy’ transactions aren’t legal. Most of these transactions are probably within the law – although the legal status of a variety of “creative strategies” may not be settled until determined by the courts – some day. I suspect, for example, that discussion amongst operators about different types of “joint ventures”, and when a joint-venturer might require an estate agents’ licence might just be one example where the law hasn’t been fully tested. The fact that a NSW tribunal ordered that the majority of an amount paid as an option payment was rent, and was to be credited to the tenant when the agreement was terminated, also suggests that the application of our current state and federal laws to these deals is far from settled.
However, the claim I am considering here isn’t one used to support the legality of rent-to-buy, but used to indicate broader mainstream acceptance and support of rent-to-buy.
“Even the banks are suggesting rent-to-buy”
In 2012, a post appeared on the Commonwealth Bank blog about the benefits of home buyers entering into rent-to-buy agreements, as a way to “get on the property ladder”.
It appeared to me that the text had been provided by someone in the “rent-to-buy” industry, and I suspect the post was not approved at a high level at the bank. I wrote to the bank and asked them about their understanding of rent-to-buy. I didn’t receive a reply but the post was subsequently removed.
While short-lived, this post excited many “rent-to-buy” businesses, which added the link to their websites with comments such as “some great articles from reputable companies supporting rent-to-own” and “link to CBA website that promotes rent-to-buy as a great option for house buyers”, “the Commonwealth Bank has stated its support of rent to buy in this article” and “even the banks are suggesting rent to buy..”.
It may be that some banks do “support” rent-to-buy – but I have seen no evidence of this, and removal of the CBA post might suggest these claims are somewhat exaggerated.
There are other claims “Rent To Own Recognised By the Banks!” apparently based on a 2011 news.com.au article by Alex Tilbury. While no longer available on the news.com.au site, I found the article copied to another site. The article is entitled “Rent to Own – Major Bank Says ‘Yes’”. Sounds promising for “rent-to-buy” promoters – but the article explains that the St. George bank announced that it would take regular rent payments into account when people applied for a mortgage. While the heading could be confusing, the article says nothing about “rent-to-buy” or “rent-to-own” arrangements.
The headline was, of course, repeated. Rick Otton commented “This is a great advantage for anyone, especially those that are in a rent to own home at the moment as they can use the ‘rent to own’ stepping stone to own their dream home even faster!”
I don’t think anyone is lying here, but the repeated use of the headline and Otton’s response might suggest that there was some particular recognition of rent-to-buy/rent-to-own contracts by the banks, which doesn’t appear to be the case.
So do banks look favourably on refinancing rent-to-buy deals?
A claim that banks are suggesting rent-to-buy not only gives the impression that rent-to-buy is broadly accepted, but may also give the impression that banks might consider an application to refinance a rent-to-buy favourably.
Different banks and lenders may have different approaches, so I’m simply offering one view here. I contacted a friend who was, until recently, a sales manager in the mortgage section of a major bank. His role included manual assessment of mortgage applications (where manual assessment was required). I asked him “To what extent do payments towards a vendor terms contract, or option to purchase benefit an individual when applying for a mortgage?”
This was his response:
“Mortgage assessments are increasingly automated. The automated assessment of capacity to pay takes into account all regular payments which don’t need to continue after the mortgage is acquired. Such payments would include rent payments, debt payments (if the debt is recently finalised), and regular savings. Payments such as car insurance, electricity or ongoing debt payments wouldn’t not be evidence of the borrower’s capacity to pay the mortgage, as these payments would continue during (at least part of) the life of the mortgage.
There is no reason that payments towards an option to purchase or a vendor terms contract would be taken into account any more than payment of rent or regular savings. In fact, if I had been required to manually assess an application at my bank, where the individual was currently buying the home under a vendor terms contract I would have regarded this as a negative. In fact as a general point, lenders tend to reduce credit scores where individuals have previously obtained credit from sources which lend to less credit-worthy individuals. This would include higher interest finance loans, but for some lenders would be likely to include vendor finance arrangements.
I would question any claim that making payments on these agreements actually assist with mortgage applications later on, or at least any more than making ordinary rent payments. I have heard that there are a few mortgage brokers who claim to specialise in obtaining finance to pay out these deals. I suspect the benefit of such a broker is that they know what not to tell the lender.
Of course, I worked at a major bank. There may be other lenders who are sympathetic to buyers who have entered into one of these agreements. However, if anyone tells you that entering into one of these agreements will be a ‘plus’ when you apply for a mortgage, you should ask for more details, ask which lender or mortgage broker they would recommend, find out the interest rates charged by the lender, and ascertain clear information to back up the benefits of entering the rent to buy or vendor terms arrangement. It is an easy claim to make, but it is the ‘buyer’ who loses out if it is wishful thinking”