What is it, and how does it work?
Whilst the most common, and cheapest, way of obtaining finance for a property purchase is through a mainstream bank, there are other options if you can’t quite obtain enough lending through a bank.
An example of a vendor (seller) leaving a deposit in when you purchase a property is illustrated well by Squirrel Mortgages:
So if you buy a place for $300,000 we arrange a mortgage with a lender for $240,000. It is interest-only to keep repayments as low as possible. We then arrange the $60,000 vendor finance as a second mortgage that is fully repaid over five years. The vendor finance will have a commercial interest rate on it of say 6.00% to 8.00% so can be a nice little earner for the vendor
With house prices here in Auckland, New Zealand accelerating at such a pace that first home buyers can’t save a deposit fast enough, encouraging a vendor to leave a deposit in might make buying your first home more achievable.
Vendor finance deals are usually negotiated off-market. The best way to get a deal is to tell everyone you know that you are looking to buy a house – including your landlord.. actually, especially your landlord as you never know what they are already thinking!
If you can negotiate directly with the owner of the property – rather than having to compete with other buyers – then you are in with a chance. If you talk to enough people then you might stumble across someone who is considering selling, but is not quite ready to make the move. If you can get in first and strike a deal that is a win-win, then that could give you the stepping stone needed to get into your first home.
I’m a huge fan of private sales, because they are the best way for a seller and a purchaser to come to an arrangement that suits both of them. Even an agreement to purchase at a later date, with no upfront deposit required, can be a huge convenience for both parties.
If you are really struggling to save enough deposit for a traditional bank to help you, there are also ‘rent to buy’ schemes available. ‘Rent to buy’ is a topic for another day, but if you have a good income, and not much deposit, a short rent to buy term might be just what you need.
With any financing deal that you undertake though, be sure to seek legal advice before signing anything! This is particularly important with vendor finance and rent to buy situations where the terms can vary wildly from one deal to another.