A Word of Advice

26 July 2004

Buying a home - what to look out for

Buying a house is probably the biggest purchase you’ll ever make – so it’s important that you understand exactly what you are getting yourself into. There are lots of different ways you can fund buying your own home. In this A Word of Advice we look at a couple of different ways of buying your own home- mortgage wrapping and rent to buy schemes- and what to look out for to avoid getting a bad deal. Both these schemes usually target people on low incomes who may be unable to obtain finance from what are known as first tier financial institutions, such as banks.

Mortgage Wrapping

Mortgage wrapping refers to a type of agreement where the owner of a property (the “wrapper”) offers finance to a consumer purchasing the property.

The wrapper typically buys or already owns the property using a mortgage from a financial institution. The property is then ‘on-sold’ to you, usually at a higher price.

The wrapper enters into a credit arrangement with you. You are usually charged a higher interest rate than the wrapper is paying on their own mortgage.

What do I need to know about mortgage wrapping?

• You have no equity in the property until you make the final payment and the title is transferred to you – the money you pay belongs to the wrapper so you cannot use it as security for a cheaper loan from a bank.
• Your name is not on the property’s Certificate of Title until you have paid off the whole of the loan, even though it is a sale of a property.
• Your situation may be out of your control. For example, if the wrapper sells the house to someone else, the new owner may ask you to move out of the house.
• Some wrappers have gone bankrupt – a contract for 30 years is a very long time to have a contract for.
• These schemes are often set up to fail – if you fail to make payments on time you are charged penalty fees, and the wrapper can make the whole amount of the loan due and payable immediately. If you can’t pay the whole amount, the wrapper can make you move out of the house, and keep everything you have paid.

Rent to Buy Schemes

Here are two different examples of rent to buy schemes:

• You move into a house and pay the owner of the house a high rent for a short period of time, and then apply for a loan to buy the house (the rent already paid is used as a deposit for this loan).
• You move into a house and pay rent, but part of this rent goes towards the deposit for a loan to buy the house.

What do I need to know about rent to buy schemes?

• In either situation, you should have both a Sale and Purchase Agreement and a License to Occupy – the document that allows you to live in the house. The main thing to check is whether you lose the rent you have paid as a deposit if your loan application is declined by a bank or other financial institution.
• The problem with these schemes is that people are at risk of being misled into thinking that they have a rent to buy arrangement, when really they are just renting. They might pay a deposit of a couple of thousand and be paying high weekly rent for years, and never actually own the house.

Advice

The Ministry of Consumer Affairs offers the following advice for buying a home:

• Always obtain independent legal advice. Do not accept legal advice from the vendor or the vendor's solicitor.
• Check that the deal you have is not just a tenancy agreement – you should have several papers such as an Instalment Payment Schedule, an Agreement for Sale and Purchase, and a License to Occupy.
• Find out what happens to your deposit and whether you get any rent money back if your loan application is declined. Remember that you still have to apply for a loan from either a bank or other financial institution at the end of the renting period in order to buy the house.
• If you have already entered into a scheme and have been told that you do own the home, check with Land Information New Zealand (LINZ) to see that your name is on the property. Contact LINZ by calling 0800 665 463 or by visiting their website.  It only costs $7 to put your mind at rest.