Underbelly: housing schemes
Vendor finance and rent-to-buy housing
schemes called a ‘black market’
The seemingly unstoppable rise in housing prices over the
last decade has caused many Australians to feel ‘locked out’ of the dream of
owning their own home.
Perhaps in response to this, a string of new businesses (called
‘equity providers’) have opened shop and now offer purchasers the ability to
take a loan to pay the deposit on their home. The purchaser then makes their
usual mortgage repayments to a bank in
addition to paying back the equity provider for the deposit, usually over a
period of 5 to 10 years. Assuming the purchaser has met their instalment
payments, each year the equity provider transfers a small portion of ownership
to the purchaser.
While this might appear to be great news for young people
entering the property market, a recent investigation has revealed that people
who enter into these arrangements are sometimes left worse off or even
financially ruined.
The way the equity provider often charges what they call
‘option fees’. These fees are paid in exchange for the right to purchase the
property from the equity provider at an agreed value when the instalments for
the deposit are paid. The option fees don’t go towards paying off the debt.
The reason these arrangements can be risky is because the
value of the property, and therefore the price the purchaser pays the equity
provider at the end of the agreement, is agreed at the beginning of the
agreement and not updated at any time before the purchaser purchases the
property from the equity provider. Just some of the issues this creates for the
purchaser include;
·
Some equity providers have over-inflated the
worth of the property and set very high final purchase prices;
·
The purchaser ends up paying exorbitant
option fees as well as funding two mortgages, and is far worse off than before the agreement; and
·
Even if the purchaser is able to meet the
repayments, there is then an over-inflated price for the property to be paid at
the end of the agreement.
Some consumer advocates have called for these schemes to
be banned, or at the very least provide protection under the National Credit
Code.
