If you are just starting out in life and looking to buy a home, it is usually a straightforward process. First, you will need a mortgage loan to finance the home. In order to qualify for good mortgage loan offers, you will need to have good credit scores before the bank will consider your application. On top of that, you will need enough cash for a 10% down payment.
This is the typical route to homeownership. It is costly and for some, it is years’ worth of saving going into the property.
What if there is an alternative? Instead of buying the property, you could rent your dream home and pay for the down payment at the same time?
The alternative mentioned is the “rent-to-own scheme”. Through the Rent-to-Own scheme, you get to rent your dream home for a certain amount of time, upon the lease expires, you have the option to buy it from the bank. Typically, a Rent-to-Own agreement will consist of two parts: A tenancy agreement and an option to buy.
Here in this article, we will explore how the rent-to-own scheme works in Malaysia, the advantages and risks involved for you the tenant. A rent-to-own scheme is essentially a more complex arrange to rent and extra precautions are needed to protect your interests.
When was the Rent-to-Own scheme introduced in Malaysia?
The Rent-to-Own scheme was officially introduced to the Malaysian property market during the tabling of Budget 2020, by then Finance Minister Lim Guan Eng, in an effort to help young Malaysians to afford their first home. However, the first RTO scheme was introduced to Malaysians by the furniture industry. Old-time furniture giants such as Court Mammoth have been using the RTO business model to rent out furniture since the early 2000s
Before RTO was introduced in Malaysia, there was a growing trend globally where the United Kingdom government introduced the “Rent-to-Buy” scheme in 2014 to help young Britons save and move up into homeownership.
Beyond the government intervention, Rent-to-Own is not new and have existed since the 1950s where it is more commonly associated with consumer goods transaction. This business model was later brought into real estate transactions between a private seller and a private buyer.
What are the different types of Rent-to-Own schemes?
Generally, there is 2 types of rent-to-own agreements; Lease-Option contract and Lease-Purchase contract. The Lease-Option contract is more buyer-friendly than the Lease-Purchase contract where the buyer is given the right and is not obliged to buy the home when the lease expires.
The lease-option contract does not force you to buy the home at the end of your tenancy agreement. If you decide not to buy the home, you are free to walk away without legal obligation. However, there is the small cost of losing the upfront fees which is considered as an earnest deposit for the home purchase.
In contrast, the lease-purchase contract binds you to the obligation of buying the home at the end of your tenancy agreement. This kind of rent-to-own contract can be a sticky mess if you are not careful and is best avoided. However, there are experienced property investors who engage in lease-purchase contracts to protect their interest in a fast-moving property market.
If you are unsure and inexperienced, it is a good idea to review the RTO contracts with a reliable conveyancing lawyer before you make any commitment.
How does the Rent-to-Own scheme work in Malaysia?
Now that you know about the 2 main RTO contracts practised around the world, how does the RTO scheme work in Malaysia?
The Rent-to-Own scheme in Malaysia involves a few key processes that you must go through,
- Survey for a suitable home that is marketed with the RTO scheme.
- Complete the lease-option contract with the developer or the financial institution providing the RTO scheme.
- A 5% refundable security deposit of the property price is paid to the developer or financial instution.
- Upon completing the legal paperworks, you can move into the selected home.
- Rent is paid according to the terms stipulated in the lease agreement.
- Typically, a portion of the lease is contributed towards the down payment for the home.
- Hence, rental rate is typically higher in rent-to-own scheme.
- When the tenancy agreement ends, you will have to decide from two choices,
- Exercise your right to purchase the home at the agreed price, stipulated in the RTO contract
- Surrender your right to purchase the property and lose the money contributed towards the down payment.
- Should you decide to purchase the home, you will no longer need to pay rent to the bank.
- Instead, a monthly mortgage instalment is in place for the home.
- Remember to pay for the monthly mortgage instalment!
Am I eligible for the Rent-to-Own scheme in Malaysia?
Generally, you need to be a Malaysian citizen, with a household income of more than RM5,000 and no more than 1 property to be eligible for any rent-to-own scheme. There are many different Rent-to-Own schemes in Malaysia, each with its own eligibility criteria and limitation.
However, there are common requirements that need to be fulfilled before you consider taking up any RTO scheme.
- The applicant must be a Malaysian Citizen
- The applicant must have a combined household income of RM5,000 or more
- The application must be complete with guarantors
- RTO scheme for
Application from Permanent Residents and Foreigners will not be entertained.
What are the advantages to the Rent-to-Own scheme?
As mentioned earlier, the RTO scheme is a well-known business strategy because it benefits both buyers and sellers. Here are some advantages typically associated with an RTO scheme,
Typically, the rent-to-own scheme is beneficial for individuals who do not have enough cash and cannot qualify for mortgage loans. The lease period allows the potential homebuyers to save up cash for the purchase while improving their credit scores.
1. Lower upfront cost to buy your dream home
The rent-to-own scheme was designed to help first-time homebuyers who cannot afford the 10% down payment. With the RTO scheme, you will be contributing small amounts from the rent every month into the down payment.
However, you should remember that a 5% refundable security deposit is required with the RTO arrangement.
2. Buy time to build better credit score
In some cases, first-time homebuyers do not have a good credit score to apply for a mortgage loan. It could be a case of lower-income or poor financial habits.
The RTO scheme can be helpful in speeding up the process of owning a home, where you get to rent the place while working on improving your earning power. In some cases, having a monthly lease term can help improve poor financial habits, preparing them for the monthly mortgage instalments.
3. Locked in home price
In a Rent-to-Own scheme, the purchase price for the property is locked in at the agreed price stipulated in the RTO contract. If the property market prospered throughout the lease period, the buyer enjoys a locked-in price for the home that is not affected by capital appreciation.
What are the risks to the Rent-to-Own scheme that you should know?
1. You do not own the home during the lease period
While you are free to use the space according to your preference, you must remember that you do not own the property and cannot make any renovation to the property structures. Hence, if you are unhappy with how the original structures are, you will need to wait until the lease is over and have taken ownership of the property before you can do any renovation.
2. You are bound by a really long lease
I do not know about you but I get very agitated when I am bound to a lease agreement, especially when the lease agreement lasts for 3 – 5 years. This is the unfortunate situation with the rent-to-own schemes where potential homebuyers are bound to the lease for extended periods with no freedom to dissolve the lease earlier.
In other words, throughout the 3 – 5 years lease period, you cannot terminate the lease agreement even if you have the necessary money to buy the property. In some cases, if you need to move between states for work, having a lease agreement from the RTO scheme can be very inconvenient too.
If you decide to default on your rent, you are also bound to the consequences of delayed or missing payment stipulated in the RTO contract. In most cases, potential homebuyers will be evicted from the property and the 5% security deposit will be forfeited.
3. You are spending unnecessarily on rent
If you are dead set on getting the property, having a rent-to-own agreement can put you at a financial disadvantage. As mentioned earlier, you are bound by a lease agreement that cannot be terminated earlier even if you have sufficient fundings to pay for the property. This extends the duration towards homeownership by the lease period, which typically is between 3 – 5 years.
In this case, you are paying an additional 3 – 5 years worth of rent for a property you intend to own in the long term. Not to forget, the rent for an RTO scheme is also slightly higher because a small portion is contributed towards the down payment.
- RTO Scheme period: 5 years
- Monthly lease: RM 2,200
- Property value: RM 600,000
- Mortgage interested rate: 3.5%
- Loan tenure: 35 years
| Rent-to-Own Scheme | Traditional Homeownership | |
|---|---|---|
| First 5 years of lease paid @ RM 2,200 per month | RM 2,200 x 12 months x 5 years = RM 132,000 | - |
| Capital borrowed from bank to finance property | RM 600,000 | RM 600,000 |
| Total interest accrued @ 3.5% over 35 years | RM 441,492 | RM 441,492 |
| Total cost of ownership | RM 600,000 + RM 441,492 + RM 132,000 = RM 1,173,492 | RM 600,000 + RM 441,492 = RM 1,041,492 |
If you consider both scenarios, you are paying 12% more by having the lease agreement. For some, the 12% have lower significance if you are already renting a place or if you need the extra time to prepare for financial status.
4. You might be buying into an overhang property
While rent-to-own schemes have always been aimed towards individuals who cannot qualify for a mortgage loan, it is also important to note that the government introduced the rent-to-own programme in an oversupplied property market.
It is fairly easy for property developers to register with banks and authority departments to have their overhang properties qualify for the Rent-to-Own scheme.
Hence, as potential homebuyers, it is always best to do your analysis of the property before deciding if the RTO scheme is suitable for your situation. If the property is being marketed with the RTO scheme, it is an added bonus for you to consider. If you need help in analysing a property’s desirability, do check out this article on the 4 key factors to consider when shopping for a new property.
Who is the ideal applicant for the Rent-to-Own scheme?
The rent-to-own scheme can be an excellent tool if you are looking towards homeownership but not quite financially ready to commit to a monthly mortgage instalment. The lease period gives you the opportunity to straighten out your financial habits and improve your credit rating while locking in the dream home at the agreed price.
If you are financially ready to buy a property, I do not recommend you to consider the rent-to-own scheme. I have shown in the earlier calculation, going through the RTO scheme will cost you 12% than a direct upfront purchase. If this amount is put to good investment use, it will make a difference to your financial portfolio.
Where can I find properties with the Rent-to-Own scheme in Malaysia?
The government initiated Rent-to-Own scheme is limited in Malaysia. The only rent-to-own provider for independent property developers is Maybank’s HouzKey programme. The rent-to-own scheme caters to development that is registered under Maybank’s HouzKey portal.
On the other hand, RTO providers such as PR1MA and Smart Sewa is limited to the PR1MA homes and the B40 income bracket, respectively.
From what I understand, the only property developers in Klang Valley to offer RTO schemes are IOI Properties and Mahsing Properties. These promotions are in collaboration with Maybank’s HouzKey programme where Maybank acts as the financial provider in the Rent-to-Own agreement. Do check out this link on Maybank’s portal where they list the developments that are supported by HouzKey.
- IOI Properties
- Malton Group
- Mahsing Properties
- SkyWorld Development
- Sunsuria Development
- Naza TTDI
- UEM Sunrise Group
If you considering a rent-to-own scheme, you might want to understand the eligibility criteria and limitations for each RTO provider. Here is a list of summarised details for your quick reference,
| Scheme Particulars | Eligibility Criteria | Benefits | Limitations | |
|---|---|---|---|---|
| Maybank HouzKey Click here for link | 1. 0% down payment 2. 3 months security deposit and is refundable 3. Property price is locked-in with low monthly repayment 4. Financial support up to RM1,000,000 5. Applicable for properties in Klang Valley, Johor and Penang | 1. Applicant must be Malaysian citizen, aged 18 or older 2. Application must not have more than 1 mortgage loan 3. No joint application with spouse is permitted 4. Applicant must include up to 3 guarantors | 1. Highest financial support of up to RM1,000,000 2. A wider selection of properties, in collaboration with independent property developers 3. No restriction on household income 4. EPF withdrawal is permit for monthly payments 5. Highly convenient paperwork process | 1. Strict regulation against missed payment, resulting in legal repercussions 2. All expenses, utilities and charges covered by the applicant |
| Skim Smart Sewa Click here for link | 1. Lower average rental 2. Properties within Selangor 3. For properties within Smart Sewa program only 4. Up to 5 years of leasing tenure | 1. Applicant and spouse must be Malaysian citizens, aged 18 or older. 2. Applicant must have financial commitment or dependents 3. Household income must not exceed RM5,000 for low-cost homes 4. Household income must not exceed RM15,000 for other types of homes. 5. Applicant and spouse must reside/work in Selangor. 6. Applicant must not have any property in Selangor 7. If applicant has a property in Selangor, it must be more than 50km from the application property's address 8. Applicant must be a registered voter in Selangor | 1. Program is supported by Selangor state-government 2. Leasing period can be between 2 - 5 years 3. 30% of rent is contributed to down payment 4. Low rental rate, subjected to market rate | 1. Demanding eligibility criteria that may not favor citizens from other states 2. Limited to properties in Selangor only |
| Perumahan Rakyat 1Malaysia (PR1MA) Click here for link | 1. For property within the PR1MA program only 2. Property prices between RM100,000 - RM400,000 3. Available nationwide as long as PR1MA properties | 1. Applicants must be a Malaysian citizen, aged 21 or older 2. Combined monthly household income between RM2,500 - RM15,000 3. Household must not own more than 1 property | 1. Program is available nationwide 2. Highly beneficial for B40 income group 3. Supported by government departments | 1. Limited to PR1MA properties only. 2. Property cannot be sold for 5 years 3. Need to be selected for PR1MA balloting. **If you do not understand the process for PR1MA application, check out this link! |
Final Word
Personally, rent-to-own is a good initiative by the government to help the lower-income group move towards homeownership. However, I am of the opinion that the property evaluation should come above any financial scheme or aid. If the property falls short on the evaluation scheme, I do not believe it is wise to take a second look because of the rent-to-own scheme.
On the other hand, if you can afford to own the property outright, I recommend you to do so without the help of the rent-to-own scheme. As I showed you in the previous calculation, the rent-to-own scheme will increase the cost of ownership by around 7% – 12% because of the lease period.
Hence, the rent-to-own scheme is a unique program specially catered for the people who need the extra time to save up and repair their credit scores.
