Important Note: Vendor finance, or rent to own finance, may not suit everyone due to inherent risks and higher costs. Before considering this route, it’s advisable to explore alternative solutions, such as a no deposit home loan. 

What is Vendor Finance? 

Vendor finance involves a buyer borrowing money directly from the property seller (vendor) instead of a traditional bank or lender. There are three main types of vendor finance: 

Standard Vendor Finance / Instalment Plan (“Wrap”): 

• A private investor negotiates to purchase a home below market value. 
• The investor buys the property and sells it to the buyer at a higher price with an extended settlement. 
• Buyer pays the investor in instalments until qualifying for a bank loan and refinancing. 

Rent to Own / Rent to Buy: 

• The buyer rents the property from the investor at an above-market rate. 
• An option is granted to the buyer to purchase the property at a predetermined price in the future. 

Financed Deposit: 

• The buyer borrows 80% from a bank and the remaining amount from the vendor. 
• Payments are made to both the bank and the vendor, aiming to refinance the vendor’s loan within two to five years. 

Is Vendor Finance a Good Idea? 

While vendor finance can be an option, it comes with higher costs and risks: 

Increased Property Cost: 

• Buyers may pay 10-20% more than the investor paid for the property. 

Higher Interest Rates: 

• Interest rates can be 1-4% higher than the rates paid by the investor. 

Negotiation Challenges: 

• Purchase cost and interest rates depend on the buyer’s risk level and ability to refinance quickly. 

Property Ownership: 

• The property remains in the vendor’s name, risking repossession if the vendor defaults on their mortgage. 

Equity Challenges: 

• Higher purchase prices and repayments make it harder to build equity for refinancing. 

Vulnerability to Vendor Actions: 

• Vendors may impose harsh penalties for missed payments, potentially voiding the contract. 

Who is Vendor Finance For? 

Vendor finance may be considered if: 

Difficulty in Qualifying with Major Lenders: 

• Alternative solutions, like a no deposit home loan, should be explored first. 

Genuine Savings or Funds Shortage: 

• Banks and lenders exist that allow borrowing up to 95% without requiring genuine savings. 

Self-Employed with Limited Income Evidence: 

• Some lenders accept alternative income evidence for self-employed individuals. 

Bad Credit History: 

• Depending on the nature and extent of defaults, lenders may allow borrowing up to 95%. 

No Credit History: 

• Building credit history through a small credit account is an option before applying for a home loan. 

Requirements for Vendor Finance 

Qualifying criteria generally include: 

Minimum 2% Deposit: 

• At least 2% of the purchase price is required as a deposit. 

Affordability: 

• The buyer must demonstrate the ability to afford the loan. 

Preferred Property Locations: 

• Preference is given to properties in major cities or regional areas. 

Affordability Assessment 

Two methods for determining affordability: 

Monthly Repayment Assessment: 

• Calculate the affordable monthly repayment and work backward to determine the borrowable amount. 

Borrowing Power Calculator: 

• Utilize bank-grade calculators to assess repayment capacity accurately. 

Refinancing to a Bank 

Timing for Refinancing: 

• No strict rules, but clear credit history, stable employment, and consistent vendor finance payments are crucial. 

Debt Threshold for Refinancing: 

• Owing less than 80% of the property value enhances chances of successful refinancing. 

Costs and Legal Considerations 

Negotiated Terms: 

• Terms of the vendor finance agreement vary and are negotiated directly between the buyer and the investor. 

Refinancing Window: 

• Faster refinancing may lead to more favorable terms. 

Legal Advice Necessity: 

• Seek independent legal advice before entering into any vendor finance agreement. 

Risk Awareness: 

• Understand that missed payments could lead to losing the deposit and property purchase rights. 

Vendor finance involves a nuanced agreement, and while general information is provided here, each agreement varies. Seek legal advice to fully comprehend the terms and assess if it aligns with your financial goals.