Rent-to-buy: meaning, benefits & how it works

The process of securing your dream property can look different for everyone, especially when your financial circumstances are more unique than the standard homebuyer’s. If a traditional mortgage seems out of reach right now, you might have heard of the term 'rent-to-buy' or ‘rent-to-own’. But is this a genuine shortcut to homeownership or a high-risk gamble?

This guide will discuss what a rent-to-own scheme is, how rent-to-own works in Australia, its potential benefits, and the very real risks you need to weigh before signing any contract.

Disclaimer: This information is for research purposes only and does not constitute financial advice. Please consult qualified financial advisers before making any financial commitment.*

Key Takeaways

• Rent-to-own combines a standard rental lease with an option to purchase the property later, usually within 2-5 years, at a predetermined price.
• A portion of your rent, or an additional weekly/monthly payment (often called a 'rent credit'), is set aside to form your deposit.
• These agreements are typically offered by specialist private providers or vendors, not banks, and you still need to secure a standard home loan at the end of the term.
• If you default on payments or don't secure finance by the end of the term, you could forfeit all the option fees and rent credits you've paid.

What is rent-to-own?

Rent-to-own, also known as rent-to-buy, is an alternate pathway to becoming a homeowner. It’s essentially a lease-to-own contract that combines a standard tenancy agreement with a future sales contract.

Unlike renting, where your weekly payments build zero equity, a portion of your rent in a rent-to-own scheme is specifically set aside to build up your house deposit (often called a 'rent credit'). And unlike buying outright with a traditional mortgage, you don't take on the full debt and legal ownership until the end of the agreed term.

The common features of these agreements include:

• A lease agreement: You sign on as a tenant and pay rent for a fixed period.
• An option to purchase: You pay an upfront fee (option fee), which gives you the right, but not the obligation, to purchase the property at a later date.
• A fixed price: The purchase price is agreed upon at the very start of the contract, fixing the final cost of the home.
• A deposit contribution: A specific portion of your monthly payment is treated as a savings contribution towards your final deposit.

How do rent-to-own properties work in Australia?

The rent-to-own process involves a defined rental phase, typically 2-5 years, leading to a final purchase decision. Here, the payment structure is built around immediate occupancy and delayed ownership.

Once you've paid your initial fee and moved in, your commitment is structured to build equity over time:

• You'll be paying above-market rent — higher than standard rates. But that extra amount is set aside as a rent credit or option premium that accumulates towards the final deposit.
• Unlike a traditional tenancy, the tenant is often responsible for routine maintenance and sometimes major repairs from the start, despite not owning the property.

The entire arrangement is governed by strict contract terms that determine the outcome:

• At the end of the term, you must successfully secure a traditional home loan from a mainstream bank to finance the purchase at the fixed price.
• If you default on payments during the term or fail to secure the necessary finance, you may forfeit all accumulated rent credits and the upfront option fee, resulting in a loss of savings contributions.

Who is eligible for rent-to-own homes?

Rent-to-own homes are specifically tailored for buyers who are close to financial readiness but have specific hurdles preventing them from getting a traditional home loan today.

The typical candidate for this scheme may be:

• First-home buyers with low deposits: The most common group. They have a stable income but are struggling to save the 10-20% deposit plus stamp duty.
• Self-employed or contract workers: Their fluctuating income or short trading history may be rejected by standard bank criteria, and the rental period gives them time to establish a solid financial track record.
• Individuals with past credit issues: They can use the 2-5 year window to repair a poor credit rating and save a larger deposit before applying for mainstream finance.
• Recent migrants: Those with strong income but a short credit history in Australia.

Benefits of rent-to-own

If you resonated with any of the buyer profiles above, then rent-to-own houses may be the right fit. This scheme can benefit buyers by allowing you to:

Skip the full upfront deposit

This is the biggest drawcard of rent-to-own homes. You can start the homeownership journey now, with a much smaller upfront payment (usually 1-5% of the purchase price) than a standard deposit (10-20%).

Buy time to save and get mortgage-ready

The fixed term gives you a deadline to save the remaining deposit, improve your credit file, and demonstrate consistent repayment history to future lenders.

Future-proof your purchase price

The fixed purchase price protects you against a booming market. If property prices skyrocket over five years, you still buy at the lower, agreed-upon price.

Test drive your chosen property

You get to live in and maintain the home before committing to ownership, giving you a real feel for the property and the area.

Risks and challenges of rent-to-own

This is where you need to be realistic. Rent-to-own comes with its own significant risks, such as:

Higher rental payments

You are paying above-market rent throughout the contract, which can strain your savings efforts. While the rent premium is intended to build your deposit, it leaves less disposable income for other necessary or unexpected costs.

Risk of losing invested money

If you default on even one payment, or if you can't secure a home loan at the end of the term, you forfeit all your rent credits and the upfront option fee. This can mean tens of thousands of dollars lost.

Fewer legal protections

These are generally private contracts, meaning you don't have the same protections as those under the regulated mortgage or residential tenancy laws, especially concerning eviction or repossession.

Difficulty if the property value drops

If the property value falls during your agreement, you are still locked into buying at the higher, predetermined price. This can make securing the final home loan difficult, as the bank might not lend against an overpriced asset.

How much does rent-to-own cost?

Rent-to-own is generally a pricier path than saving a deposit and getting a standard mortgage, primarily due to the higher payments and non-refundable fees. This number can differ depending on factors like your chosen provider, property type, contract terms, etc.

This is an example of what the costs might look like for an $800,000 property on a 5-year rent-to-own contract:

	Key numbers	Notes
Agreed purchase price	$800,000	The price is fixed at the start of the 5-year term.
Option fee	$24,000 (based on 3% of the purchase price for this example)	This fee typically ranges from 1% to 5% of the purchase price ($8,000 to $40,000) and is usually credited toward your equity.
Set-up fees	~$10,000	This is a service charge that can range from $5,000 to $15,000 depending on your provider.
Total weekly rent (including option premium)	$875	This is your total marked-up weekly rent based on a $700 market rent; implies a 10-40% premium over market rent.
Equity built towards purchase	$69,500	Sum of option fee ($24,000) and weekly premium ($175 over 260 weeks), which forms your effective deposit.

After completing the 5-year rent-to-own term, your total cash outlay will be approximately $261,500 (covering all rent, set-up fees, and the option fee). This spending secures $69,500 in accumulated equity, leaving you to finance the remaining $730,500 of the purchase price. Ultimately, the full cost to secure this $800,000 home will total around $992,000 (before interest and standard buying fees).

Rent-to-own vs. traditional home loan

How does a traditional home loan differ from rent-to-own? Here’s what sets them apart:

Key factors	Rent-to-own	Traditional home loan
Financing method	Private contract with an option to purchase; still requires a final bank loan.	Regulated loan from a bank or lender.
Ownership timeline	You are a renter until the final loan is secured and purchase is complete.	Immediate ownership upon settlement.
Upfront costs	Option fee (1-5% of value) and bond/first month’s rent.	Deposit (up to 20% of value), stamp duty, and LMI (if applicable).
Long-term costs	May be higher due to above-market rent and non-refundable fees.	Generally lower interest rates and market-driven property price.
Risk profile	You risk losing all contributions if the deal falls through; limited regulation.	Heavily regulated, clear processes for hardship.

When it comes down to it, the rent-to-buy scheme could be a better fit for those with stable income but low savings (or a poor credit history) who still need time to prepare. On the flip side, potential buyers with a solid deposit and good credit history who are ready to commit now may find a traditional loan more appealing.

Things to consider before entering a rent-to-own agreement

If you're still considering this path, do your homework like you would for any major financial commitment. Adopt these best practices:

• Review the contract terms: Crucially, identify all default triggers (e.g., one missed payment) and the harsh penalties.
• Understand market conditions in your area: Understand the risk if local property values fall. You are still obligated to buy at the fixed price, potentially making the final loan hard to secure.
• Seek out financial and legal advice: Consult with the experts before you make any major financial moves. Look into hiring your own independent solicitor (to review the contract) and mortgage broker (to verify your path to securing a final loan).
• Assess long-term affordability: Look beyond the rent. Can you afford the mortgage repayments, council rates, and maintenance costs once you officially own the home?

Legal and regulatory framework in Australia

The regulatory environment for rent-to-own schemes in Australia is complex and warrants extreme caution. These contracts often fall outside the protection of standard financial credit laws, meaning buyers get the short end if the deal collapses.

Limited consumer protections

Because they are usually private contracts, you don't receive the same legal safeguards as a borrower getting a regulated home loan under the National Consumer Credit Protection Act. When things go wrong, buyers can lose all their contributions.

State-based differences

Regulation varies significantly by state. Victoria has banned many rent-to-buy agreements due to the high risks to consumers. South Australia heavily restricts them. In other states, they are subject to general contract and tenancy law, making independent, specialist legal review essential.

Regulator warnings

Bodies like the Australian Securities and Investments Commission (ASIC) have issued strong public warnings about these schemes, noting the potential for exorbitant costs and the high risk of buyers losing tens of thousands of dollars if they default or fail to secure the final finance.

Alternatives to rent-to-own in Australia

If the risks of rent-to-buy are too high, here are safer, more regulated pathways to homeownership in Australia:

First Home Super Saver Scheme (FHSSS)

The FHSSS is one of Australia’s government initiatives that lets you save your first home deposit inside your superannuation fund. You can make voluntary contributions (up to $15,000 annually, $50,000 total), which are generally taxed at a lower rate (15% for pre-tax contributions). This helps your savings grow faster, and you can withdraw the contributions plus associated earnings when ready to buy.

The Australian Government 5% Deposit Scheme

Formerly the Home Guarantee Scheme, the Australian Government 5% Deposit Scheme is designed to help eligible buyers secure a home with a small deposit (minimum 5% for first-time buyers, 2% for single parents or legal guardians) while avoiding Lenders Mortgage Insurance (LMI). The scheme is now uncapped, with removed income limits, making homeownership more accessible.

Shared equity schemes and state-based support

Shared equity involves a state or federal government body taking an equity stake in your home (e.g., up to 40% under the upcoming Help to Buy scheme), which dramatically reduces the size of the deposit and home loan you need. Most states also offer valuable assistance like the First Home Owner Grant (FHOG) and crucial stamp duty exemptions or concessions to lower your upfront purchasing costs.

Guarantor home loans

A guarantor loan allows a family member (usually a parent) to use the equity in their own property as supplementary security for your loan. This third-party security helps you borrow over 80% of the property's value, enabling you to get a loan with a deposit as low as 5% or even zero, while often allowing you to avoid Lenders Mortgage Insurance (LMI).

Saving for a traditional deposit

Despite the waiting time, disciplined saving is still the safest and most cost-effective path. Your money remains secure and controlled by you in a high-interest savings account or under the FHSSS. Once you hit the required deposit threshold, you retain full freedom to choose any property and any lender, securing a standard home loan with all the necessary legal protections.

Conclusion: Is rent-to-own the right option for you?

Ultimately, rent-to-buy is an expensive bet on your future self's ability to secure a home loan. It’s a tool for specific circumstances, not a risk-free shortcut for everyone.

Opt for rent-to-buy if:

• You have a stable, verifiable high income but a low-to-non-existent deposit and need 2-5 years of forced saving.
• You have minor credit issues (e.g., old defaults) that you can realistically resolve and repair within the contract period.
• You are confident the property's value will increase significantly, and you are prepared for the risk of losing your contributions if you can't secure the final loan.
• You have secured independent legal and financial advice that has confirmed the contract is fair and achievable.

Avoid rent-to-buy if:

• Your income is unstable or unpredictable.
• You have major credit issues that are unlikely to be fully resolved in a few years.
• The contract's terms are complex, or you cannot afford to lose the option fee and all accumulated rent credits.
• You could realistically save a small deposit (5% to 10%) and qualify for a government-backed or guarantor scheme within a similar timeframe, as these are much safer and more regulated alternatives.

Contact the Frasers Property team today to explore our residential communities that may house your future home — whether that’s backed by the rent-to-own scheme, government support, or your own hard-earned savings.

*Disclaimer: All opinions, estimates, forecasts, statistics, links to external websites, conclusions, recommendations, and underlying assumptions contained within this webpage are made and expressed by Frasers Property Australia in good faith, in the reasonable belief that they are correct and not misleading as at the date of publication. This content is of a general nature only and does not take into account your personal objectives, financial or taxation situation, or needs. It does not represent financial, taxation, legal, or other professional advice and should not be regarded as such. Information about grants, schemes, and other costs is provided for general guidance only and may change over time. Frasers Property Australia does not make any express or implied representations or warranties that external links or third-party information are accurate, complete, or current. Before acting on any information provided, you should fully consider its appropriateness for your circumstances and, if necessary, seek independent professional advice.

Date of publication: January 2026.