Can The New Rent-To-Own Scheme Help You Buy a Home?

The Malaysian Government recently announced the Rent-To-Own scheme (RTO)  to facilitate buyers who cannot obtain a housing loan to buy a house under the Perbadanan 1Malaysia People’s Housing Programme (PR1MA).

The Government first launched PR1MA in 2012 as a measure to plan, develop, construct and maintain affordable houses for middle-income households in key urban areas. PR1MA is open to all Malaysians, aged 21 and above, with a monthly household income between RM2,500 to RM7,500.

In recent years, property prices have skyrocketed and have become out of reach for many. While some had to move far away from the city to purchase affordable homes, some still had to rent. Owning their very own home seemed like a fantasy that would never come true.

PR1MA has more than 700,000 interested buyers listed on its national registration system. Unfortunately, not everyone was successful in securing a home loan with the banks, which has spurred the government to introduce RTO scheme. “This programme is to help applicants who are rejected by the bank, such as those without permanent jobs or a bad track record,” said Datuk Seri Najib Tun Razak during the launching.

How does the scheme work?

In a standard home purchase, the sale takes place immediately. If the buyer does not have enough money to pay for the home, the transaction is then completed by securing a home loan from the bank.

However, the RTO scheme offers another alternative of buying a home but purchase transaction does not take place immediately. The tenant/buyer makes monthly rental to the seller (e.g. Government, developer or bank) for 20 to 30 years, and those payments are contributed towards reducing the purchase price needed to own the house.

At the end of the rental tenure, the tenant/buyer will take ownership of the property.

Who qualifies for this scheme?

The scheme will only be offered to registered buyers under PR1MA, who had applied to at least three banks and still unable to secure a home loan.

Potential buyers generally fail to obtain bank financing under PR1MA due to absence of steady income or have low credit scoring.

In order to help these individuals achieve their dreams of owning a home, the Government plans to team up with the banks and offer a 20 to 30-year rent-to-own option to them. At the end of the RTO period, the house will become theirs. This scheme will also benefit individuals who cannot afford a house down payment.

What are the advantages?

Being unable to obtain a housing loan due to absence of a permanent job, non-satisfactory credit record or lack of house down payment will no longer be barrier to own a home.

Under the RTO scheme, prospective buyers will be able to rent their PR1MA homes for a low rental rate extended between 20 and 30 years. This payment will 100% be credited towards reducing the purchase price of the property.

In addition, buyers will have an immediate feeling of pride of ownership and able to build on their asset. They will care for their soon-to-be property, make enhancements, and feel good realising their rent money is earning them a home in the long run.

Buyers will also be able to lock in today’s purchase price, as home prices are constantly on the rise.

What are the disadvantages?

The rent payment is non-refundable and fully owned by the bank. If you indulge in a late payment or violate the Rent-To-Own contract obligation, you could risk losing the home and the money that you have paid in the form of rent all the while.

If you owned a home under the usual bank loan agreement, non-payment could lead your home being auctioned away for the bank to recover their loan amount. However, there are still chances for you to obtain some excess from the auction of the house, minus the loan amount.

For now, RTO seems like a good avenue for individuals who cannot secure a mortgage to still be able to own a home. It could be a stepping stone for individuals whom have all the while only rented and dream of owning their own home.

But, would a house cost more when purchased this way? We will have to wait for the Government to release more information on this scheme. Before signing up for this, make careful considerations of the pros and cons. If all seems right and in place, you could very well own a home soon!

If you are not eligible for PR1MA but still have a hard time saving up to buy your first home, here are 10 steps to save up for your down payment.