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See Also: Renting vs Buying
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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 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 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.
While each Rent-To-Own Scheme has its own set of criteria and requirements, some salient requirements can be seen. They include: –
Foreigners are not allowed to apply in this scheme, while the situation is unknown for permanent residents.
Every scheme relating to the real estate industry has its perks and benefits, and the Rent-To-Own Scheme is no different. Some of the advantages of this scheme are: –
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.
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.
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.
The Rent-To-Own Scheme offers its applicant a chance to ‘try out’ their new home. The lease period can be used to check out the neighbourhood, getting adjusted to connectivity, and uncover any potential issues with their home itself. 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.
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.
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.
While the Rent-To-Own 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. For example, if an applicant has a lease term of 5 years and chooses to buy the property, he is bound by the loan repayment period.
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 might result in eviction from the property, leading to the applicant being homeless.
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.
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.
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.
While there are many institutions and organisations that provide Rent-To-Own Scheme or similar, interested persons should take note of the three most sought-after and well-known Rent-To-Own Scheme in Malaysia; Maybank HouzeKEY, PR1MA, and Smart Sewa by Rumah Selangorku.
Maybank is one of the few banks in Malaysia to offer a Rent-To-Own Scheme through the Maybank Islamic wing. While PR1MA and Smart Sewa are only applicable for property up to RM500,000 or less, Maybank HouzeKEY offers this scheme for properties up to RM1M. Another benefit of HouzeKEY is that Maybank collaborates with property developers, giving more property options to potential applicants.
Scheme details: –
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.
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.
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.
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