A Rent-To-Own (RTO) agreement is a contract that gives you the option to buy a rental property in the future. Read this article to find out how it works in Malaysia and the pros and cons you need to consider before opting for it.
In a news report, Bank Negara’s Director of Financial Surveillance Department Qaiser Iskandar Anwarudin said most Malaysians could not afford to buy newly-launched houses with an average price of RM417,262, and that the maximum affordable house price nationwide was at RM282,000.
“The affordability (in Malaysia) has deteriorated with the median multiple affordability (the ratio of house price to households’ annual income) rising to 4.8 times in 2016 from 3.9 times in 2012,” he said. Data also shows that income and house prices have not been growing in tandem over the years.
Although wages have not grown - and even decreased due to inflation - housing prices remain flat instead of progressing with the value of salaries and wages. (Image source: The Edge)
But not all hope is lost. Through the government’s Rent-To-Own Scheme (RTO), more Malaysians could own a property at a more affordable rate.
Though the scheme is still in its relative infancy in Malaysia, rent-to-own or rental-purchase concepts have been a regular practice globally for some time.
How does a Rent-To-Own Scheme work in Malaysia?
Essentially it is a “lease-purchase” agreement signed between the buyer and the developer, giving the buyer the option to buy the rental at a specific future date after a certain period of years. In the meantime, the buyer may rent the property to “test it out.” Isn’t that cool?!
The duration is subjective and depends on individual circumstances. Some may rent it for five years, and others might rent it out much longer like for 10 years. At the end of this contract, the buyer may exercise the option to purchase the property. And that folks, is how it gets the name: rent-to-own.
Another common attractive feature of this scheme is buyers are not required to fork out large sums of money for the down payment, which is a typical requirement when buying a house in Malaysia.
What Rent-To-Own Schemes are available in Malaysia?
See below if you are eligible for some of the RTOs in Malaysia, which include the Maybank HouzKEY, Skim Smart Sewa, and PR1MA.
- Full 100% financing with no down payment required.
- No payment during construction and Maybank will finance the cost during construction.
- Lowest monthly payment.
- Malaysian citizens only.
- The applicant must be between 18 - 70 years old at the point of application.
- The applicant MUST NOT have more than one home financing at the point of application.
- You may include up to three guarantors to improve the success rate of your HouzKEY application.
- Malaysian buyers, including their partners only
- The applicant must be 18 years old and above and must have a family or have dependents.
- The income of the whole family:
- Not exceeding RM5,000 per month and below for Type A house rental applications or low-cost houses.
- Not exceeding RM15,000 per month and below with priority given to those with income less than RM10,000 per month for Type B, C & D house rental applicants including medium and medium cost houses.
- The applicant or his/her spouse lives or works in Selangor.
- The applicant does not have or own a residential house in Selangor.
- The applicant has a residential house - but is located more than 50km from the place of rental, and within 25km of his/her workplace.
- The applicant is a voter in Selangor.
- Rental period:
- Maximum 5 years
- Minimum of 2 years
Deposit (subject to current rental rate):
Two months rent + current rent (one month) + utility charges + other charges
- The applicant must be a Malaysian citizen
- Individual or combined household income (husband and wife) between RM2500 and RM15,000 monthly
- Single or married and age 21 and above
- Owns no more than one property between you and your spouse - if any
The pros and cons of Rent-To-Own schemes
At this point, this scheme sounds exciting, but let’s take a more objective look at the pros and cons of rent-to-own and weigh them carefully because, at the end of the day, no option is 100% risk-free.
RTOs were created with the intent to aid low-income families and bring them into the housing property market - despite them not being able to afford the downpayment or qualify for housing loans.
Alternatively, buyers will only need around three months’ rent to be eligible – depending on the selected scheme. This is a cheaper alternative compared to the regular 10% deposit to own a home.
2. You get to try it out first
The beautiful thing about RTOs is they allow buyers to stay in the property as a rental before deciding on whether to purchase the property. This puts the buyer on course to start the process of owning a property, even if they are currently unable to qualify for a home loan.
3. You get to lock in a good price
Buying a home can be somewhat competitive seeing how you’ll be competing with others for the best price (this doesn’t include the market value), but with RTO, you’ll get to lock in the purchase price of a property based on the current value.
The advantage of this is getting a fixed sale price - even if you decide to purchase the property years later when the market value has steadily increased.
1. Forfeit money paid for having the option to buy (if you decide against it)
If you decide that the house is not your cup of tea, you will sort of lose the investment you’ve put into the house for having it as an “option.”
2. Property prices may fall lower than the locked price
Being able to lock in prices may act as a double-edged sword against you. If property prices suddenly start dropping, you may not be able to benefit from this because you will still have to buy it at the original price you agreed to.
Should I get a house under the Rent-To-Own Scheme?
There are several situations where we recommend you get a house under an RTO scheme.
If you are not qualified for a home loan, or are unable to afford the downpayment – but at the same time – have sufficient monthly cash flow to pay off the payments, then go ahead.
Other than that, we also recommend RTO properties if you are looking for an affordable house, don’t mind renting for an extended period, and can bear the restrictions as stated in the lease term. Some people may not fancy the idea of not being able to renovate or make changes to “their house” for an extended time.
The big difference between RTOs and regular property purchase is finances. You will be spending way more on the downpayment (or 10% of the property price to be exact), compared to only needing to pay 1-2% for the property price for a 3-month rental downpayment.
Verdict: Go for the choice that makes the most sense to your finances and circumstance
At this juncture, rent-to-own properties are still limited in Malaysia, so take advantage of it if you can and are comfortable with the arrangements.
Buying a property is a big deal for many of us, so if you don’t fancy the idea of living in a rented house for around 10 years, then RTO may not work for you.
We hope you found this useful!