Looking for a new place to call home remains the South African dream. It’s unsurprising most Lotto winners jump into homeownership after a windfall. For the rest of us without a winning ticket, there are still plenty of avenues to own the roof over your head.
Applying for a home loan remains a popular option and a typical rite of passage for many first-time buyers. However, rent-to-buy or rent-to-own is also putting keys in the hands of aspiration home-seekers. Here is a breakdown of each finance avenue and reasons to consider which one is best for your needs.
What is rent-to-buy?
This is a leasing arrangement where you pay for the rental of a property and also additional payments. At the end of a set period, you have the opportunity to buy the property. There are two lease agreement options for rent-to-buy: lease option and lease purchase. The lease option gives you the flexibility to opt out of buying the property while the latter places an obligation on you to purchase the property as initially agreed.
When should you consider rent-to-buy?
While not as well known as home loan applications, rent-to-buy offers prospective buyers in financially challenging circumstances some definite perks:
You are unable to qualify for a home loan: Although home loan providers have an appetite to provide first-time buyers with a loan, not everyone might make the cut. Rent-to-buy is a good option if you haven’t built up a good credit score, don’t have an established employment record, or can’t qualify for the home loan amount you need. It’s also helpful if you are unable to put down a deposit for a home loan, although home lenders do provide 100% and over home loans to cover all costs involved.
You want easier access to a rental: Having a tenant on a rent-to-buy lease is very attractive to landlords. Because you’d be motivated to keep the property in good condition with a view to buying, it gives your landlord peace of mind.
You want to move into your dream house: As a rent-to-buy leaser, you are able to live in your ideal home even if it is out of your reach through a home loan. You won’t have to wait to save money or improve your home loan eligibility. This is particularly helpful if you are financially stable but don’t have access to immediate capital or have built up your financial profile.
You want to test-drive your home: Buying a home is a significant financial decision and the wrong move can prove costly. Depending on your rent-to-buy lease agreement, you can get a feel for your home and the neighbourhood. If it’s to your liking, you will have the first right to buy the property.
You want to lock in a purchase price: If the property market changes, you won’t have to worry about an increase in interest rates. The owner will have to sell you the agreed purchase price when you first signed your contract. This can also work in your favour as property prices increase or if the neighbourhood becomes sought after.
You don’t want the hassle of moving: If you opt to purchase your home, you won’t have to worry about the costs and frustration that come with moving. The rent-to-own contract also takes away the stress of your landlord selling at some point.
A rent-to-buy option offers significant benefits over applying for a home loan depending on your financial situation. It’s best to look over a contract carefully and consult with a qualified real estate expert who can ensure you are well informed and your rights are protected.
What is a home loan?
This is money lent by a home loan provider, usually a bank, that helps you cover the purchase of a home. Also called a mortgage or a bond, you will pay back a portion of the loan together with interest on a monthly basis over the course of the bond duration.
When should you consider a home loan?
If you meet the requirements and can keep up with payments, home loans provide a good avenue to fund your real estate purchase. Here are the benefits of applying for one compared to rent-to-buy:
You want to save cash: Rent-to-buy monthly payments are higher than home loan repayments. This is because you will pay towards your rent as well as a portion of the home purchase. In comparison, you can also shop around for the best payment terms with different home loan lenders while you will have to agree to the terms of your landlord/future seller.
You don’t want additional maintenance: Even though you don’t own the property, some rent-to-buy contracts can require you to do additional maintenance of the property. While you would have to do this with a home loan property, you won’t have the additional rental costs to worry about.
You need funding for renovations: If you wish to improve your home, you can get extra funding such as a 105% home loan. FNB’s Future Use, for example, can be used for home improvements that will increase the value of your home.
You want a more secure option: While home loan providers can be flexible with missed payments, skipping payments with your landlord can create a violation of your contract. You could end up losing the extra money paid and have your right to purchase under the agreement cancelled.
If you have the financial and credit strength, a home loan is an option that has helped millions of South Africans buy their homes. You can even make larger payments, reducing your debt and getting your title deed even quicker.
Buy your home with Seeff
Whether you opt for a rent-to-buy scenario or go the home loan route, Seeff can help you reach your real estate goals. We can help you negotiate and understand rent-to-buy contracts or assist with our bond calculator tools and bond origination services.Get in touch with our team today.
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