Here’s how your rent can help you buy your first home
What if we told you that your monthly rental installments could be used to help you buy the home you’re already living in?
Rent2buy, the brainchild of lawyer Meyer de Waal, is a relatively new product (based on an old concept) that allows tenants to buy the homes they’re currently living in by allocating a portion of their monthly rental to a deposit. The model can also be applied to any other home they may have their eyes on.
Each transaction is unique, where the current homeowner enters into a contract with the tenant to buy the home after a certain number of months.
“We work out the Rent2buy term, based on a thorough analysis of the credit rating and affordability of the client, and the prospects to repair and improve the negative items on his/her credit rating and affordability,” says de Waal, noting that if at the end of the term the tenant is still declined a loan from the bank the Rent2buy term can be extended. “This is done if we can identify it is a minor problem that can be solved.
“But if the purchaser did not repair his bad credit score or improve affordability, the seller retains all monies paid as ordinary rental received.”
Consumers owe as much as three quarters (75%) of their monthly earnings to creditors, according to a BusinessTech story published last August in which debt management company, Debt Rescue, was quoted.
Similarly PayProp CEO, Louw Liebenberg, notes that when consumers are stretched financially, most seek out short-term debt to ease the burden. Currently, this means that the average tenant has eight store (Credit Provider Association) accounts and three loan (National Loan Register) accounts.
The average cost to consumers to repay these accounts is R10,620 per month, which is 43% of the average tenant’s after-tax earnings of R24,442.
“If consumers were able to balance their debt obligations with their ability to manage their credit, that would be acceptable,” says Liebenberg. “But the reality is that instead of reducing their level of debt, consumers are increasingly dipping into their available credit resources.
“In a sample of 20,000 prospective tenants, PayProp found they have used up almost 70% of the available credit that has been provided to them. This means that their ability to absorb any economic life shocks is vastly limited. And considering that after debt repayment, their next largest financial commitment is rental, which is R6,576 (or 27% of a tenant’s after-tax earnings) on average.”
This means that buying your first home is much more difficult, with banks scrutinising consumers’ expenditure and debt commitments much more closely and being required to factor in affordability in the face of further interest rate increases.
As a result the rental market has literally taken off and many first-time buyers are forced into renting for longer to save up for a deposit. Mortgage originator, BetterLife, pegs it at two to three years on average during which half of these buyers are able to save up at least 20% of the purchase price (that’s R200,000 on R1m).
Bond originator, ooba, reports that fewer home loan applications are also being submitted – something Rhys Dyer, CEO of ooba, believes signals diminished buyer confidence in the light of current economic conditions and rising interest rates.
“The successful approval rate for home loans is down by 2.7% year-on-year for Q1 of 2016, and drifting 0.8% lower against Q4 of 2015,” he says. “These are the early signs of the financial pressure facing South Africans due to deteriorating economic conditions, rising interest rates and higher inflation rates. Fewer buyers are qualifying for finance as affordability constraints kick in.”
“Forget about paying back someone else’s bond – use your own monthly rent payments to fund not only the purchase of your own home, but also a deposit to put towards the property and reduce your home loan when you eventually apply for a home loan,” says de Waal. “Rent2buy is an initiative that looks to take the financial downside of renting, and instead turn those monthly payments into a positive.”
The pre-agreed installment is paid directly to the seller and a portion of the rental is credited towards a deposit received if the transfer is registered; if the transfer is denied, the rental is forfeited as ordinary rent.
“Usually, market-related rental is about 75% to 80% of a home loan repayment multiplied by the purchase price,” says de Waal, noting that in the Rent2buy scenario the client will pay a rental that is close to a home loan repayment, plus rates, taxes, levies and insurance.
But where do would-be buyers find homes where the current owners are open to this type of deal?
Buyers don’t have to look too far as one developer in Johannesburg’s suburb of Northriding is testing the model. Robbie Cohen of development firm, Domito, is test driving the Rent2buy product with the company’s maiden Isabel Estate development.
“We decided to allocate a number of our units to the Rent2buy model as we see it as a great way to help buyers who can’t afford to buy directly,” says Cohen. “We just want to give buyers another option to help them buy their own homes.”
Cohen says that despite only launching the Rent2buy model very recently, the developer has already allocated tenancies to interested applicants who are currently going through the Rent2buy application process.
“Our clientele are mostly young professionals, 60% of whom can’t buy but would love to live in a high-end estate,” he says, noting that those who go through the Rent2buy process are many times more reliable tenants. “They look at the bigger picture because they look after and take more pride in their homes.”
The Rent2buy model also benefits the homeowner – especially those who are behind on their monthly repayments.
“Our first Rent2buy client was in fact in arrears with her bond installments,” says de Waal. “But after eight months of Rent2buy was in credit again as she used the surplus income to get her bond repayments up to date again.
“A formal deed of sale is prepared as well as an option, plus a lease agreement. All of these documents are signed by the seller and the purchaser.”
By partnering with Rent2buy, prospective buyers are given time to get their credit record scores and/or affordability up to the standard most lending institutions require, while letting a portion of their rental double as a deposit.
To assist Rent2buy clients to achieve their dream of securing a home loan at the end of the Rent2buy term, a debt resolution and affordability improvement programme are combined with a full homeownership education course “This ensures the Rent2buy client is fully prepared for his homeownership journey,” says de Waal.
Isabel Estate offers innovative and sophisticated living in the heart of North Riding. Comprising of four contemporary, architecturally designed buildings, each with its own beautifully landscaped courtyard, tenants can enjoy all the modern amenities at hand. Each build comes with semi-basement parking, while a clubhouse and swimming pool are shared, within a secure complex that offers great value for both upcoming professionals and families alike. A kid’s play area is already in the pipeline.
Rent2buy and Domito Ltd hope to make superior developments like Isabel Estate available to everyone that is almost ready to buy, but yet still declined by a bank to qualify for a home loan.
“Their aim of a quality product at a competitive price meets the ideals of Rent2buy,” says de Waal. “These include looking to help everyone achieve their dreams of owning a property they can be proud of.”