Rent-To-Own Scheme: A Surging Option

Rent-To-Own Scheme: What is It?

Rent-To-Own Scheme is a scheme introduced in Malaysia to own a property by leasing a selected property for a set amount of time before purchasing it. To put in everyday words, it’s similar to free samples but with a price, with such prices being affordable.

Rent-To-Own Scheme: How Does it Work?

Rent-To-Own Scheme may sound complicated but breaking down the process makes it look easy for the average consumer. The scheme involves a few key processes that the applicant must go through: –

• The applicant selects a property which is offering the Rent-To-Own Scheme
• Developers/parties who provide funding for schemes, such as banks, require applicants to sign lease documents stating the lease terms
• Security deposits are usually refundable which are around 5% of the property price.
• As soon as all formalities and legalities are completed, the applicant can move in.
• Rent is paid according to the lease terms in the rental period.
• Once the lease term has matured, the applicant has two choices: –
• Exercise his right to purchase the leased property at the locked-in rate when the lease was signed (price when the lease was signed); or
• Waive his right to purchase the leased property and not purchase the property

The scheme can be likened to a hire purchase agreement for motor vehicles. The hire purchase agreement is a bailment with an option to purchase. When a hire purchase agreement is signed, the buyer receives the car from the dealer, but the actual owner of the vehicle is the bank or financial institute financing the purchase.

Once the buyer pays off his loan amount to the bank, the buyer can ‘purchase’ the vehicle and ownership is transferred to the buyer. Rent-To-Own Scheme is similar to this, but ownership is not transferred to the buyer and remains with the developer or the party affording the scheme.

Rent-To-Own Scheme: Does it Apply to Everyone?

While each Rent-To-Own Scheme has its own set of criteria and requirements, some salient requirements can be seen. They include: –

• Applicant must be a Malaysian citizen
• The applicant must have the correct number of guarantors, usually from family members
• A combined household income ought to be above RM5,000 and above.

The Advantages: Rent-To-Own Scheme

Foreigners are not allowed to apply in this scheme, while the situation is unknown for permanent residents.

More affordable housing

One of the main reasons this scheme was introduced is to help lower-income families to afford a house. The Rent-To-Own Scheme allows these families to purchase a home even if they cannot fulfil the 10% down payment or ineligible for a bank loan due to insufficient income.

No down payment

Ask any homeowner what their biggest hurdle is purchasing a home, and their answer would most probably be not fulfilling the 10% down payment. With the Rent-To-Own Scheme, homebuyers can essentially bypass the 10% down payment requirement, which would often be a significant amount considering the property prices in Malaysia these days.

Securing a Loan

Initially, a household might not have sufficient income to be eligible for a bank loan. By applying the Rent-To-Own Scheme, these households would have a home for themselves for the agreed lease period. It is highly possible that the family’s income would increase and make them eligible for a bank loan within that period.

Try before you buy

The Rent-To-Own Scheme offers its applicant a chance to ‘try out’ their new home. The lease period can be used to determine whether or not the home itself is in need of repair, if it is connected, and to observe what the neighbourhood has to offer.If the applicants are not satisfied with their home, they can always opt not to exercise their right to purchase the property and look for alternatives.

Locked-in price

A significant benefit of the Rent-To-Own Scheme is that the applicant can lock in the expected price when purchasing their home after the lease has expired. For example, if an applicant locks in a property for RM700,000 in 2021, he would still be able to purchase the unit at RM700,000 after the lease agreement has expired. The longer the lease period, the better as the applicant would be able to save more.

Refundable deposit

Most Rent-To-Own Scheme would require a security deposit of around 5% of the value of the property. This deposit will be refunded regardless of the applicant’s decision after the expiration of the lease agreement. The deposit money later can be used for other valuable purposes.

The applicant does not own the property

While the Rent-to-Own (RTO) scheme offers an easier way to own a property, the applicant does not own the property through the lease period, and the wait becomes longer if the applicant decides to purchase the property at the end of the lease. The loan repayment period applies to an applicant who has a 5 year lease and buys the property.

This would result in the applicant waiting for a longer time to get ownership of his house, while a person who opts for a traditional bank loan would only be bound by the loan repayment period. The only consolation is the Rent-To-Own Scheme does not require a down payment.

Failure to pay rent is dangerous

Failure to pay rent might result in eviction from the property, leading to the applicant being homeless.

Drop at property prices

A Rent-To-Own Scheme is a viable option as long as property prices are increasing. But when prices take a downturn, applicants would be bound to the lease agreement even though they can afford to purchase the house traditionally.

Bound by the lease

Once the applicant signs the lease agreement, he will be bound to the contract for the entire lease period. Things become worse if the lease period is signed for an extended period of time, like 3 or 5 years. This could result in the applicant not being able to dissolve the lease despite obtaining the financial capability to purchase a home through a bank loan.

Higher spending compared to a traditional purchase

Keep in mind that the applicant has to go through the entire lease period and then the bank loan’s period. This could result in a Rent-To-Own Scheme applicant forking out more money than a traditional purchaser. Assume that the lease agreement for a Rent-To-Own Scheme is 5 years at RM2,000 per month, and the applicant later purchases the unit valued at RM 700,000 through a bank loan at a 3.5% interest rate for 30 years. The applicant would need to pay RM1,131,593 in loan repayment, including interest, and an additional RM120,000 under the scheme, for total spending of RM1,251,593. Do note that this amount can increase due to bank interest rates.

A traditional purchaser would only pay RM1,131,593 and save the RM120,000, which can be used to finance another property or vehicle. Furthermore, a conventional purchaser would obtain ownership of his house in 30 years. An applicant under the Rent-To-Own Scheme in the exact scenario would need 35 years to acquire ownership.

Rent-To-Own Scheme: The Institutions Offering the Scheme

1. Maybank HouzeKEY

Scheme details: –

• 100% financing
• 0% down payment
• 0% payment when the property is in construction
• Three-month security deposit, which is less than 1% of the property price and is refundable
• Locked-in prices with low monthly repayment
• Financing up to RM1M
• Available for properties in Klang Valley, Penang and Johor

Criteria

• Applicant must be a Malaysian citizen
• Ages 18 to 70
• Home financing cannot exceed one per applicant
• Applicant can include up to 3 guarantors
• Applicant cannot apply jointly

Pros

• Financing up to RM1M
• A more extensive selection of properties
• Collaboration with property developers
• Can be used for completed and future projects
• Available for properties in Klang Valley, Johor and Penang
• No restriction on household income
• Bumiputra discount
• EPF withdrawal can be used to cover monthly payments
• Stamp duty waiver on Memorandum of Transfer (MOT) and financing agreement
• 10% discount on the purchase of primary property market
• Applicant can appoint a nominee who can continue with the scheme if the applicant passes away
• Payment begins from the date of moving in or 14 calendar days after the date of move issued by the Bank for collection of keys

Cons

• Missed payment will be considered as default with legal repercussions
• The applicant is responsible for all expenses, charges and utilities

2. PR1MA (Perumahan Rakyat 1Malaysia)

PR1MA is an initiative by the Malaysian government that affords affordable homes to the B40 income group. PR1MA launched their own Rent-To-Own Scheme as applicants were ineligible for a traditional housing bank loan. This scheme will begin in June 2021 for all PR1MA projects in Malaysia.

Scheme details

• Property prices between RM100,000 and RM400,000
• Properties available nationwide

Criteria

• Applicant must be a Malaysian citizen aged 21 or above
• Applicant’s combined monthly household income must be within the range of RM2,500 and RM15,000
• A maximum of one property can be owned by the applicant and their spouse

Pros

• PR1MA properties are located nationwide
• Scheme available for existing and future PR1MA projects
• B40 income group would benefit without the need for a bank loan
• Government-backed scheme

Cons

• For a period of five years, the property cannot be sold or transferred without PR1MA’s approval.
• Limited to PR1MA properties only
• A limited number of units available and might result in a high rate of rejections

3. Smart Sewa

SMART Sewa is the Rent-To-Own Scheme by Rumah Selangorku, a housing initiative by the Selangor State Government. The scheme targets the B40 income group of Malaysia by offering this scheme for properties ranging around RM200,000.

Scheme details

• Low average rental
• Properties all over Selangor
• Up to 5 years initial tenure

Criteria

• Applicant (and spouse if any) must be a Malaysian citizen
• Applicant must be aged 18 and above
• Applicant must have a family or financial commitment
• Applicant’s monthly household income must not exceed RM5,000 for low-cost homes; or not exceeding RM15,000 for other types of homes, with priority given to applicant with monthly household income not exceeding RM10,000
• Applicant and/or applicant’s spouse must reside or employed in Selangor
• Applicant must not have any property in Selangor, and property applied for must be within a 25km radius from the applicant’s place of employment
• If the applicant has another property in Selangor, the property being applied must be located more than 50km from the applicant’s first home
• Applicant must be a registered voter in Selangor, i.e. applicant votes for a Parliamentary constituency and state constituency within Selangor

Pros

• State-government backed initiative
• Minimum 2 years and a maximum of 5 years of initial tenure
• A 30% return of the total rental is paid and is used as a deposit if the tenant can buy the property within the stipulated 5 years tenure
• Low rental rate, subject to the market rate of the location of the property

Cons

• Limited to properties in Selangor
• Higher number criteria, which an applicant may not be able to fulfil
• Applicant married to a non-Malaysian would be ineligible even though the applicant satisfies all other criteria

Rent-To-Own Scheme: Should You Apply?

It all comes down to the applicant’s financial capabilities and whether the Rent-To-Own Scheme is the best option out there for them. It is highly recommended that future applicants familiarise themselves with the quirks and nicks of the Rent-To-Own Scheme and gather all intel before utilising it.

Disclaimer

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