Commonwealth Bank backs OwnHome as alternative option for first home buyers

One of Australia’s oldest mortgage lenders, the Commonwealth Bank of Australia (CBA), is putting its money behind one of Australia’s newest rent to own start-ups, OwnHome, as high house prices send more first home buyers in search of alternative paths to home ownership.

Through its venture-scaling entity x15ventures, CBA has announced a minority investment in OwnHome, which helps eligible customers rent and save for their first home without the deposit requirements of a traditional mortgage. This allows prospective home owners the opportunity to enter the property market without having to spend years saving, or hitting up the Bank of Mum and Dad for help (which isn’t an option that’s available to everybody).

How OwnHome works

Prospective borrowers in Sydney, Wollongong, Newcastle, Brisbane and the Gold Coast can contact OwnHome to start an application. Based on your income, assets and credit history, OwnHome will help you determine your purchasing power. After paying a starter fee of 1.5%, you can go shopping for an already-constructed house, townhouse or strata unit. 

Once you’ve found the property you want to live in and one day own, OwnHome will buy it, you’ll enter a rental agreement with them, and you'll move in. You’ll also pay 1% of the property’s value upfront as a Purchase Offset - effectively your equity in the property. By keeping up with your rent, you’ll build your Purchase offset by 2.5% of the home value each year.

After renting and building up your Purchase Offset three to seven years, you can buy the property from OwnHome at a predetermined price. Additional terms and conditions apply, which are detailed fully on OwnHome’s website.

What are the risks of renting to own?

While OwnHome is a newer kid on the block, other rent to own options have been available in Australia in the past, some offered by property developers. These have attracted their share of criticism, with a 2016 report from the Consumer Action Law Centre finding no successful examples of rent to buy deals at the time, describing them as “extremely financially risky and the legal protections for buyers are grossly inadequate.”

Some of the risks involved with rent-to-own include:

• You’re not the legal owner of the property
• Strict terms and conditions – missing a rent payment could mean forfeiting the house altogether, along with any money you’ve already paid
• Higher than average rents, fees and purchase prices
• Locked in for years – no easy option to refinance with a different lender
• Fewer finance providers and properties to choose from

Before signing up with any rent to own provider, remember to thoroughly read the terms and conditions, and consider seeking professional financial and legal advice and/or contacting a mortgage broker.

Other options for buying your first home

As well as renting to own, some of the other options available to help first home buyers to rent and save and/or purchase a property with a low or no deposit:

Lender’s Mortgage Insurance

You can still apply for a traditional home loan from many lenders with a deposit as small as 5 per cent of the property value. However, if your depsoit is les than 20 per cent means you’ll also have to cover the cost of Lender’s Mortgage Insurance (LMI), which covers the bank (not you) if you end up defaulting on your repayments. The lower your deposit, the more you may pay for LMI, potentially adding tend of thousands of dollars to the upfront cost of your home loan.

Guarantor

Sometimes nicknamed the Bank of Mum and Dad, this is where your parents (or grandparents, or similarly close relatives) guarantee part or all of your home loan’s deposit using the value of the equity in their own property. This means you can get a loan with a low deposit or even no deposit, without having to stump up the cost of LMI.

However, not everyone has parents who hold the kind of equity required to become a guarantor. Plus, becoming a guarantor is a significant responsibility that can make an impact on your parents’ finances.

Government support programs

As well as the First Home Owner’s Grants (FHOGs) that are offered by state and territory governments, the federal government offers the First Home Loan Deposit Scheme (FHLDS). This lets borrowers get a mortgage from a selected panel of lenders and pay a deposit of just 5% on the property, with the government effectively guaranteeing the remaining 15% to sidestep the need for LMI. However, eligibility criteria applies for both borrowers and the properties they purchase, and there are a limited number of places available in the scheme each financial year.

First home buyers may also be able to save up a deposit using their super fund and the First Home Super Saver (FHSS) scheme. You can withdraw up to $10,000 from the extra voluntary contributions you’ve made to your super fund (not the required 10% of the income from your employer) to go toward your deposit.

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