Rent to Own Homes - The Definitive Guide

Affordable home ownership is the aim of the Housing Foundation's rent-to-own 'HomeSaver' scheme. We look at what it offers, the pros, cons and everything you need to know

Updated 6 August 2020

Houses throighout New Zealand remain unaffordable for a not insignificant percentage of the population. To avoid a life of renting, a number of organisations have launched 'rent-to-own' housing schemes. In this guide, we outline what is offered, how to qualify, the costs, the benefits and what to watch out for.

Generally, rent-to-own schemes are aimed at people who can't easily get approval for a mortgage to buy their first home. Our guide covers:

• What is Rent-to-Own?
• Qualifying for Rent-to-Own
• Rent-to-Own Homes in a Nutshell
• Pros and Cons
• Concluding Comments and Making an Application

Know this first: This guide primarily covers the Housing Foundation's rent-to-own HomeSaver scheme. However, there are other schemes offered around New Zealand. Before signing up to anything, be very careful about what is being offered and what the costs are. Always take independent legal advice. Some rent-to-own home schemes charge fees, command higher weekly rents, have clauses about what happens to the money you've paid if you change your mind later on. You may also have a mortgage application turned down if the scheme appears to be unaffordable.

Alternatives to rent-to-own: Low-deposit home loans, KiwiBuild and the Kāinga Ora Grant program. 

What is rent-to-own?

Rent-to-own, or rent-to-buy as its sometimes called, is an agreement which gives a property’s tenant the right to buy the home at the end of a pre-set rental period.

Rent-to-own schemes vary in nature – some stipulate that a percentage of the weekly rent goes towards building equity in the property. Others instead have different terms and conditions. The overall aim is to benefit the tenant and set them up for long-term financial success through discounted homeownership. In some cases, the promoter of the rent-to-own scheme sets rent at below-market rates. This allows the tenant to save more and put it towards the property.

Why does rent-to-own exist?

The reality is that many New Zealanders can’t afford homeownership due to several reasons – bad credit, unable to save a deposit, COVID-19 issues and lending restrictions implemented by the banks. With rent-to-own, the prospective home buyer works with the seller to finance the purchase of the property using a scheme that is fair for both parties.

Many people will never be able to qualify for a traditional mortgage, even if arranged by a mortgage broker (LINK). Owning a home via rent-to-own is likely to be the only option for many people who won’t otherwise be able to save for a deposit.

What are the costs of rent-to-own?

Generally, a rent-to-own buyer moves into a property, pays rent and builds up savings to help with a deposit to ultimately purchase the home. This is a valuable option for families who may not have the necessary credit score to get a traditional mortgage.

Rent to Own Homes (also known as 'HomeSaver') – Four things to know about qualifying for the program

There aren’t many organisations that offer rent-to-own opportunities, but the Housing Foundation (LINK) is New Zealand’s leader in such schemes. The primary focus of this not-for-profit is to assist people into homeownership. Their rent-to-own scheme is at the heart of this objective, and dozens of families have benefited in recent years. 

To understand if you qualify, we've outlined what their assessment team is looking for should you want to make an application:

You must be in the household income range to qualify for rent-to-own

​The Housing Foundation makes it clear – “your total household gross (before tax) income must be approximately between $65,000 and $95,000 per year. This may vary depending on the location of the development you apply for”. More details are outlined here.

You’ll need to have ‘manageable debt’

To qualify for a rent-to-own scheme, your debt levels must be manageable. Specifically, the Housing Foundation expects such debts to be paid off within five years. This will include things like car loans, personal loans and debt consolidation loans. At the application stage, you will be assessed as you may be suitable for other support.

​Location is a big factor in assessing suitability

The Housing Foundation only has a certain number of projects and homes available. This means you’ll be limited by where you can live. If you’re flexible as to your location, you’ll have a higher chance (all other things being equal).

​You’ll need to be able to arrange a mortgage after five years of renting

The Housing Foundation makes it clear that after renting your home for five years, you will need to be approved for a mortgage to buy a minimum of 60% of the purchase price of your home. The home will be revalued after five years, and you will get 25% of the uplift in value to put towards a deposit.

Rent-to-Own Homes in a Nutshell – Our Guide to How the Housing Foundation's Program Works (and What You Need to Do)

With every rent-to-own agreement, there is a “5-Year Occupation Agreement”

The Occupation Agreement provides the same rights as a Residential Tenancy Agreement but with one key difference: You have the option of purchasing the home after you’ve been renting it for five years.

Importantly, it’s not a contract to purchase – it’s only an ‘option’. If you find that after the rental term the home isn’t for you, or your personal circumstances change, you can move out of the property as you would do with any rental. As is typical of any rental property, a bond is required – the Housing Foundation stipulates this is the value of three weeks’ rent. 

Important: The Occupation Agreement gives you an absolute right to occupy the home for up to five years. This means if you keep up with rental payments and want to stay year-after-year (up to five years in total), you won’t have the risk of being given notice by the landlord.

Your rent will almost certainly be below-market rates

The Housing Foundation assesses your household and income and determines a fixed weekly rent based on what you can afford. It states that what you pay will never be above the market rates. The idea is that below-market rental costs allow your household to save as much as possible for your home deposit.

After five years, you will have the option to purchase the home. You’ll get a cash boost of 25% of any increase in the property’s value

​The rent-to-own scheme is focused on maximising the deposit. It does this in five ways:

1. KiwiSaver - To help build your deposit, the Housing Foundation requires that you join KiwiSaver and actively contribute alongside your employer.

2. 25% share of property value increase (paid in cash) - you’ll benefit from receiving 25% of any increase in the property’s value over the five-year rental period. This is paid in cash by the Housing Foundation into your house deposit savings. This cash payment, alongside KiwiSaver first-home withdrawal (LINK) and personal savings, can boost your deposit significantly. To explain the 25% boost, let’s work through an example:

• Matthew and Jo begin renting a rent-to-own property in 2021. The day they move in, the property is valued at $800,000 (known as the “starting price”). 
• When the rent-to-own scheme finishes in 2026, the value of property is $1,000,000
• The difference in value is $200,000 and a 25% share is $50,000. This money is paid to you by way of a house deposit contribution id you decide to take up the right to buy the property. 
• An independent registered valuer values the property, with a copy of the valuation provided to you. 

3. The starting price is always below the market valuation – this means that if there is a property value increase over the five years, you will get more money from your 25% share.

4. Rent is below-market – as mentioned above, the Housing Foundation discounts rent to allow you to put cash towards a deposit. 

5. You’re protected from falls in house prices in the first five years – if you agree to purchase the home at the end of the rental period, the starting price of the property is irrelevant if the current prices are below what it was first as assessed at. While you won’t get 25% of an increase paid in cash, your home becomes more affordable overall. 

Know this: The Housing Foundation believes that you’ll be able to afford the proposed mortgage payments after five years. This is because the application process evaluates your income and finds an affordable property. However, if property prices double over the first five years while you rent, you’ll get a cash benefit for 25% of the difference. This will help your deposit although it’s arguable that the property is relatively less affordable.

Rent-to-Own Homes: Pros and Cons

​The following pros and cons apply to the Housing Foundation scheme. Other schemes differ, and the following information may not be relevant.

Pros for Buyers

1. Your rent is competitive or below-market: This helps you build up a deposit should you want to take up the option of homeownership
2. You can avoid buyer competition: You won’t face open homes, auctions or anything similar. Instead, you have the first right to buy the property that you’re familiar with.
3. There’s no obligation to go ahead: Should you decide the rent-to-own property isn’t for you, you’ll get your bond back at the end of the five years. You won’t lose any deposits or down payments.
4. You have time to arrange your mortgage: There’s a five-year lead in to put together a deposit and approach lenders. This means you have lots of time to form good money habits, pay down personal debts and save up for a deposit.
5. 25% share of house price increases: Should the current market price be above the property’s starting price valuation when you started renting, you will be paid out 25% of the increase which you will put towards your deposit.

Cons for Buyers

1. You may have to pay for repairs and maintenance while you’re renting – check the agreement to be sure. If in doubt, ask about the responsibilities of the Housing Foundation and which are yours. Unexpected costs can slow down savings goals.
2. Your personal situation will need to stay the same (or improve) over five years – you are assessed for affordability so going to a single income if you decide to have children may not be an option if the mortgage would otherwise become unaffordable.
3. You’re fixed to one location – if your job shifts or you decide to move for any other reason, then keeping your rent-to-own property may be difficult (and expensive).​

Rent-to-Own Homes: Concluding Comments

• In a Stuff.co.nz interview, the Housing Foundation's operations general manager said the rent-to-own homes "worked with people to pay down debt, save and 'buckle down' to achieve the goal of home ownership". He concluded that the goal is "usually achieved in five years".
• We tend to agree with that - rent-to-own won't appeal to everyone as the locations are limited and getting accepted into the scheme is difficult given the already long waiting list.
• Unlike other schemes, the Housing Foundation's rent-to-own model did not put a portion of rent towards equity. This means you'll only pay market (or below-market) rent, and enjoy all the benefits. 
• We believe the scheme is an excellent offering and has numerous benefits for any New Zealand family who can qualify. 

​

Next Steps: Applying for the Rent to Own (HomeSaver) Programme

1. The Housing Foundation requires you to apply online.
2. You’ll be assessed based on your financial circumstances and a member of the Housing Foundation will get in touch with the decision.
   
3. If you don’t qualify for the rent-to-own, you may qualify for the Shared Ownership Programme. We have not reviewed this offer in any detail and suggest taking independent advice before entering into a shared ownership home purchase. 

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• KiwiSaver First-Home Withdrawal Guide
• ​First Home Loan Guide