How could OwnHome work for you?

You may have heard about OwnHome, the rent-to-own startup backed by the Commonwealth Bank, looking to bring a new way to get your foot onto the first rung of the property ladder. But how exactly do the costs break down, and are you really better off than using a traditional mortgage?

How OwnHome works 

In brief, here’s how you’d buy a home with OwnHome:

1. Fill out OwnHome’s application form
2. OwnHome will assess your income, expenses, and credit history to work out a maximum budget for you
3. Pay the Starter Fee of 1.5% of your maximum budget to help cover OwnHome’s costs, such as stamp duty.
4. Choose a property with OwnHome’s help. Once you’ve found a place you like and fulfils OwnHome’s eligibility criteria, OwnHome will buy the property.
5. Pay a 1% Initial Option Fee (Initial Security Deposit in QLD) to establish your Purchase Offset - effectively your equity in the property
6. Start paying rent – a percentage of each rent payment will go towards building your Purchase Offset
7. In 3 to 7 years time, you can exercise your option to purchase the property at a predetermined price - the initial purchase price, compounded by 3.8% per year – using your Purchase Offset and a traditional mortgage from another lender.

For example

As a hypothetical example for illustrative purposes only, imagine that after filling out OwnHome’s application form, you are approved for a maximum purchase price of $1 million. You pay a starter fee of 1.5% - in this case $15,000.

With OwnHome’s help, you find a property with an asking price of $1 million, which OwnHome arranges to purchase (if your property’s price is less than your buying power, part of your starter fee would be refunded).

You then pay OwnHome 1% ($10,000) of the property value to start building your Purchase Offset.

You start paying rent at a rate of 7.05% of the purchase price per annum – in other words, $70,500 per year, or $5875 per month. This may seem like a high rent, but keep in mind that a percentage of it will be going towards building your Purchase Offset. Each year, you should build 2.5% of the OwnHome Price as a purchase offset out of your rent payments.

Each month, the OwnHome Price will increase slightly, reaching a 3.8% increase per annum. As such, your monthly rent will also increase over time to keep up, so you can keep building your purchase offset.

Cost calculations are approximate, based on an annual increase in the OwnHome price of 3.8%, rather than a monthly increase of 0.32%. Your final cost breakdowns using OwnHome may be different. 

Obviously these prices will be lower if you were to choose a cheaper starter property, e.g. one that’s $500,000. That said, OwnHome encourages users to aim for their “dream home”, with a maximum purchase price of $1.8 million in Sydney, so you may be paying more rather than less.

Stuff to keep in mind

Rent to buy options like OwnHome can be useful to aspiring homeowners in the right financial situation, and allow you to start your property journey without as many of the barriers that can be found in traditional mortgage lending.

But there’s no such thing as a free lunch – here are a few areas to be aware of before taking the plunge: 

You still have upfront costs to pay

OwnHome acknowledges that saving a 20% deposit is one of the biggest factors blocking frustrated first homebuyers from getting a mortgage. 

However, between OwnHome’s Starter Fee and this initial contribution to the Purchase Offset, you’ll have to save the equivalent of a 2.5% deposit to use OwnHome. This can still be a significant sum to save, depending on the property, and it’s worth keeping in mind that some lenders will offer home loans with 5% deposits, and the government’s Family Home Guarantee allows eligible single parents to buy with just a 2% deposit.

While paying OwnHome’s starter fee means you won’t have to cover costs like stamp duty and conveyancing upfront, remember that you may need to pay for these yourself when you exercise your option to buy further down the track.

You’ll still need to get a mortgage

After renting and saving with OwnHome for up to seven years, you’ll be required to either exercise your option to buy the property, or walk away from the deal (which could mean forfeiting your Purchase Offset unless you arrange with OwnHome to sell your option, minus a platform fee of 20% of the OwnHome sale price). 

To buy the property, you’ll need to successfully apply for a mortgage from a bank or other lender. This will require you to fulfil a lender’s eligibility criteria around income, expenses, and more. Depending on your lifestyle and financial situation, there’s no guarantee a lender will approve your home loan application, which could leave you in a difficult position.

You may need to pay Lender’s Mortgage Insurance (LMI)

Even with OwnHome’s help building a Purchase Offset, you may not have enough equity available to cover the 20 per cent deposit most lenders require to avoid being charged for Lender’s Mortgage Insurance (LMI).

Depending on when you exercise the option, this could potentially add thousands of dollars onto the upfront costs for your new mortgage – the smaller your Purchase Offset, the more your LMI may cost.

Of course, you may also be able to benefit from the First Home Owner’s Grant (FHOG) or get help from a guarantor to cover the remainder of the deposit. 

Fixed price growth can swing both ways

The 3.8% growth in the OwnHome price is intended to help shield you against the risk of property values rising wildly out of control, leaving you unable to afford the property. Even if prices in your area rise significantly over the term of your OwnHome lease, you’ll still only need to pay your initial purchase price, compounded 3.8% per annum. This could potentially get you a bargain deal on a property in a high value area. 

However, the reverse is also true. If property values grow more slowly than 3.8 per cent per annum, or even fall in the area you purchase (remember that major banks are forecasting that property prices could drop by as much as 10 per cent next year), you’re still obliged to pay OwnHome the agreed purchase price plus 3.8 per cent per annum, which may be much more than the property is worth. This could affect your ability to get a home loan if it turns out your loan to value ratio (LVR) is too high following the bank’s valuation of the property.

Alternative options you could consider

Renting to own with OwnHome or a similar service could be a convenient way for some Australians to rent and save a deposit on their first home. But there are other options to also consider when working out the best choice for your financial situation:

• Saving with a savings account or a term deposit: Saving money the old-fashioned way may not be easy, especially with savings interest rates on the low side. But it is one of the more secure ways to protect your savings with deposits in Authorised Deposit-taking Institutions (ADIs) guaranteed by the government’s Financial Claims Scheme (FCS).
• Saving with your super: Making extra deposits into your super fund, either as a pre-tax salary sacrifice or out of your taxed income, can be used to build up part of a property deposit, thanks to the First Home Super Saver (FHSS) scheme. As you can’t easily access money from your super fund outside of specific circumstances, your deposit savings are less likely to be used for other expenses.
• Using the First Home Owner Grant (FHOG): Depending on the state or territory where you live, you may be able to access a significant grant when paying the deposit on your first home. Keep in mind that eligibility criteria will apply.
• Using the FHLDS or FHG: A limited number of eligible borrowers per financial year can access the federal government’s First Home Loan Deposit Scheme (FHLDS) to buy an eligible property with a 5% deposit and pay no LMI. Eligible single parents may be able to pay a deposit of just 2% with help from the Family Home Guarantee (FHG).
• Paying Lender’s Mortgage Insurance (LMI):Paying for LMI isn’t an easy ask if your deposit is low, but sometimes it’s one of the fastest ways to get a home loan with a small deposit and put your first foot on the property ladder.
• Getting help from a Guarantor: If you’re in a position where a parent or other close family member can guarantee your mortgage with the equity in their own property, you may be able to buy your first home with a low deposit or even no deposit, and pay no LMI. That said, becoming a guarantor is a significant responsibility, so it’s important to be aware of the risks involved.
• Brokers: A mortgage broker is a home loan expert who may be able to help you crunch the numbers and work out some of the best options for buying your first home. Visiting a mortgage broker typically doesn’t cost anything, as brokers are paid commissions by mortgage lenders when they help sign up new customers. Brokers are obliged to act in the best interest of you, the borrower, so you should be able to rely on their advice.

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