Updated: Monday 28 April, 2025
Vendor finance is when a purchaser acquires the funds to purchase a property not from a bank or standard lender but from the vendor/seller itself. There are three main types of vendor finance in Australia.
Types of Vendor Finance
1. Standard Instalment Plan
This works by an investor/vendor purchasing/owning the property and then the purchaser comes to an agreement with the investor/vendor on the purchase price (usually at a higher than market value). The purchaser then pays the vendor in instalments over several years or until such time as they can qualify for a loan with a bank or refinance.
The big risk with this option is that the property is not in the purchaser’s name, and if the vendor does not pay his mortgage there is a chance of losing the property as well as all monies paid to the vendor.
2. Rent to Own/Buy
This works by a vendor renting a property to a purchaser (usually at a higher than market value rent,) and after a specified amount of time the purchaser has the option to purchase the property at a set price.
If a purchaser does not have the means to secure a traditional home loan but wants to purchase the specific property, this option can secure the property until such time that the purchaser can obtain a traditional home loan. It is important to note that in recent years, greater regulatory attention has been given to ensure transparency in rent-to-own agreements, particularly regarding clear disclosure of terms and risks.
3. Financed Deposit
This works in addition to a traditional loan. A purchaser would obtain a standard loan of 80% from a bank or lender and the other 20% would come from the vendor. Payments are then made by the purchaser to both the vendor loan and to the bank loan.
The goal for the purchasers in this circumstance is to refinance the bank loan within a few years and payout the vendor loan with the new refinance.
Benefits and Risks of Vendor Finance
Although vendor finance can be a positive if you don’t have genuine savings, are self-employed or have a bad credit history, like most things there are risks in taking a vendor financed option which includes paying higher than market value, the higher interest rate on repayments, does not build equity as quick and penalties for missed repayments can be harsh like voiding the agreement entirely.
In today’s environment, vendor finance interest rates may be significantly higher than traditional mortgage rates due to increases in broader lending rates from 2022 to 2024.
Eligibility Requirements and Regulatory Updates
Most vendor finance is offered by corporations, and there is still a criterion required to satisfy the eligibility requirements. Most criteria are a certain percentage of price for deposit payment (previously around 2% but often now closer to 5%–10%), being able to afford the repayments, and most corporations want the property to be in a major city where the return is guaranteed.
In addition, purchasers should be aware that ASIC has increased its scrutiny of arrangements that may amount to “credit activity” without an appropriate licence, particularly where vendors are involved in financing multiple transactions.
Importance of Legal Advice
For the above reasons and others, it is critical that purchasers have independent legal advice if they are considering entering into any type of vendor finance arrangement. Ensuring that the agreement is properly structured and compliant with the National Consumer Credit Protection Act 2009 is more important than ever.
Purchasers should also refer to official guidance, such as ASIC’s Moneysmart information on Rent to Buy and Vendor Finance , for a broader understanding of the risks involved.
If you are thinking of entering into a Vendor Finance agreement as the Vendor or borrower, Coutts can assist to ensure that you are protected and draft the agreement between the parties.
Please note the above advice is general only and is specific to the individual Contract in question.
For further clarification on the above, please feel free to phone me to discuss.
ABOUT CHRISTINE JOHNSEN:
Christine is a licensed conveyancer and Justice of the Peace at Coutts’ Narellan office. She is highly efficient and is able to assist clients with matters concerning; the sale and purchase of residential and commercial property, retirement village contracts, put & call options and family transfers.
For further information, please don’t hesitate to contact:
Christine Johnsen
Licensed Conveyancer & JP
info@couttslegal.com.au
1300 268 887
CONTACT COUTTS LAWYERS & CONVEYANCERS TODAY.
This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.
