Rent-To-Own In NZ: The Definitive Guide

Feb 07, 2022

New Zealand houses are skyrocketing, making rent-to-own a more popular option for many. Also called lease-to-purchase, it’s a programme or scheme that gives Kiwis time to save up for their dream first home while living in it at the same time. 

It’s a flexible option as it gives you an easier way to own a home. While different schemes offer varying terms and conditions, its ultimate goal is to help the tenant on their journey to homeownership at a discounted rate.

Rent-to-own homes are increasing in popularity, especially amidst the COVID-19 crisis. If you’re looking to get one, check out this definitive guide.

Table of contents

What is rent-to-own?

Rent-to-own offers the tenant to rent a property over an agreed fixed lease period — usually up to 5 years. Once this period is over, you have the right to purchase the house. Depending on the contract, you can also refuse to buy the property after the lease expires.

How does rent-to-own work?

There are typically two methods on how to work out the rent in your scheme.

1. When you pay your rent, a percentage of it goes to purchase the property.

This goes to the deposit, interest, mortgage, as well as total value of the house. However, this usually means your rent is higher than your neighbours because you also pay for these other financial obligations.

2. The rent is lower than the market rate so you can save for the property.

On the other hand, your programme can also arrange for your rent to be lower than your neighbours'. This allows you to save for the deposit, interest, mortgage, and the total value of the house, while on the agreed fixed term.

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Who should get a rent-to-own scheme?

Uncertainty in our financial systems like changes in loan-to-value ratio (LVR) restrictions and amending loan application laws have made it more difficult for regular Kiwis to get approved in their mortgage plan. Even if you have a regular income, enough deposit, and excellent credit history, your application may still end up getting rejected.

A quick look in the Auckland property market reveals average house prices rose by $113,000 during the lockdown in Auckland, or just within three months. For context, this is three times higher than the average annual income of Aucklanders. 

Fast-rising property prices plus stricter application processes result in a housing crisis in New Zealand. Rent-to-own has been very helpful amidst the rising property value in major development areas throughout the country. 

You should consider getting into a programme if:

Your mortgage always gets rejected

As mentioned, getting approved for a traditional mortgage plan is only getting more difficult — even if you tick all the boxes. Getting into a rent-to-own programme allows you to save up more for the deposit, which may increase your chances of getting approved.

Your financial situation will improve over the fixed term

If you’re sure to be more financially stable once the agreed fixed period expires, this is a great option for you. This may mean managing your debts better to have a good credit rating and increasing or having more streams of income.

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You want to avoid the competitive property market

One good thing about rent-to-own is that you can skip the timely and exhausting bidding, open homes, or anything similar. Even if your lease ends, you’re the priority as the buyer of the house.

You’re affected heavily by COVID-19

Mortgages haven’t been decreasing even amidst the pandemic. If your livelihood is heavily affected by COVID-19, rent-to-own schemes can be a great alternative to the ballooning interest home loan rates.

Who offers rent-to-own programmes in NZ?

While this is becoming a more popular financing option, only a few organisations offer rent-to-own programmes.

Housing Foundation Rent-to-own (HomeSaver) Programme

Housing Foundation HomeSaver Programme is the leading rent-to-own scheme in New Zealand, aiming to assist people into non-for-profit homeownership. They’ve helped a lot of families have their first home over the recent years.

To qualify, you must:

  • Be a first-time homebuyer
  • Have a household income range between $65,000-$95,000 annually, although this may still vary depending on the location.
  • Have a ‘manageable’ debt — car loans, personal loans, debt consolidation loans, credit cards, or anything similar — that can be paid off within 5 years.
  • Be fine with a limited number of houses in selected locations only.
  • Get approved to a mortgage plan after five years of renting, with a minimum deposit of 60%. Do note that the home will get revalued once the lease expires with a 25% uplift going to the deposit.

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Tāmaki Rent-to-Buy Programme

From the name itself, Tāmaki Rent-to-Buy Programme is for Tāmaki whānau. They have schemes such as the Shared Home Ownership programme that lets you use half of the value increase of your home as your deposit.

You’re eligible if:

  • You have a connection to Tāmaki and work in the suburb. While all New Zealanders will be entertained, Tāmaki Housing tenants, Māori whānau and Pasifika kainga will be prioritised.
  • You have to be ‘mortgage ready’ once the five-year lease expires, meaning you’ve saved up for the deposit of the mortgage.
  • You have enough household income, savings, and manageable debts. Talk to a housing manager to have a comprehensive consultation.

What should you know when getting a rent-to-own scheme?

Rent-to-own programmes are accessible to Kiwis in different circumstances. Here are some things to take note of.

Determine the value of the property

Aside from rent, you also have to work out the value of your property after your lease ends. There are two ways to go around it.

  1. The value of the property is fixed upon sign up. This is calculated based on the estimated value of the property after the fixed lease period expires. 
  2. The value of the property is assessed after the lease expires. This can be more expensive as it's influenced by factors like inflation.

It’s wiser to pick the former option, especially with factors such as the pandemic. Even if all factors are considered, it mostly turns out to be less expensive than when the property is assessed after the lease expires.

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Check how much goes into the property purchase

Before signing any contract, you have to clear what percentage of your rent goes to the house purchase. There’s no standard rate, so it’s up to your agreement with the owner. Some programmes also have upfront non-refundable fees that don’t go to the property.

As a rule of thumb, read the fine details to familiarise yourself with all the fees relevant to your rent-to-own programme.

Get proof of ownership from the seller

In some cases, the ‘owner’ isn’t really the legal owner of the house. A rent-to-own tenant may be paying a portion of their rent to the property, but end up getting repossessed by the bank as the ‘owner’ has defaulted in his mortgage repayments.

Make sure you have proof that the seller actually owns the house. Check the legitimacy of the certificate of title with Land Information New Zealand (LINZ). Also, it should be stated clearly in the contract that they want to sell the house to you after the lease expires.

Mortgage vs rent-to-own: Which one should you choose?

A mortgage plan is still the best way to purchase a house. It’s more straightforward — you pay directly to the property value over a set period. Whatever customisations you do to the home remains permanent too, as the owner of the property. Most of all, it’s covered by house, content, or house content insurance.

As mentioned, getting approved for a mortgage plan is easier than done. Even if rent-to-own involves more processes — making your journey to homeownership longer — for a lot of Kiwis, it’s their best option. Until they can finally get approved for a home loan, it will do its job.

If you’re ready to get a mortgage plan, make sure to have the best rates from providers. Use our free mortgage calculator, right here at glimp, to get customised results.

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