Strategies

Vendor Financing: How it Works and Should You Use It?

July 9, 2020
Invex
Invex Team

When purchasing property in Australia, some prospective homeowners turn to vendor financing as an option. But, what exactly does vendor financing involve?

This form of financing involves receiving a loan directly from the seller of the property, as opposed to a loan from the bank. The buyer provides the seller with a deposit, and the seller loans the money required to complete the property purchase. This principle is then paid back in much the same way as a bank loan would be.

But is this a viable option for buyers? Let's explore vendor financing in a little more detail.

Vendor Financing Benefits 

While the vendor financing model is a less conventional financing option for those buying property in Australia, the method does have its benefits in some cases. As with other highly personalised financing options, vendor financing can offer significant advantages for home buyers given it’s flexibility.

Lower loan entry requirements

Since you are working with the seller directly, you may be able to agree more favourable terms on the loan between the parties. The seller may not hold the same requirements for your purchase as the bank would, for example.

Get onto the real estate ladder sooner

Saving a deposit takes a significant amount of time for many prospective Aussie homeowners. Vendor financing offers options to those who have not saved up enough deposit to achieve a loan from the bank, allowing them to get onto the housing ladder more quickly.

Repayment flexibility

Since the terms of the loan are agreed with the seller, you may be able to leverage a more flexible loan repayment schedule based on the terms agreed between you and the seller.

Vendor Financing Risks

The counterpoint to these advantages are, of course, the risks. It is important that all Australian property buyers carefully review their vendor financing deal, including checking the terms of their agreement with a solicitor to ensure that they are securing a favourable arrangement.

Higher purchase prices

With limited options, buyers may find themselves offered higher than market values for the property by sellers looking to make a profit. Be sure to check that your property is offered at a value properly anchored to market values.

Higher interest rates

While interest rates can be lower in some cases, in the majority of instances the seller can charge you a higher rate of interest. This may be higher than that given to you by the bank due to the seller requiring additional benefit in return for the high risk in providing the loan in some instances.

Fees and costs

Even though you are not working with the bank, you will still find yourself subject to fees and other costs associated with purchasing a property in the terms of your loan agreement. These terms can include harsh provisions for missing repayments. Be sure to check your vendor financing agreement with a solicitor.

Conclusion

Vendor financing certainly has its advantages, and can be a viable way for Australians to make a property purchase.

However, it is important to assess the risks carefully and consult a solicitor before moving ahead with your transaction. Not all vendor finance property deals are made equal with some opportunities offering greater flexibility and advantages than others.

If you are looking to buy a property without a deposit, there are other options out there. Read our guide on how to buy a property without a deposit.

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