Examine the advantages and disadvantages in choosing Rent-to-Own (RTO) in Malaysia versus conventional home loan financing to gain confidence and address your concerns in making one of the biggest financial decisions in your life.
What is Rent-to-Own (RTO)?
Rent-to-own or rental-purchase is relatively little known in Malaysia but has been around overseas for decades. One of the first RTOs was not property but instead a business model renting out furniture which started out in the 1950s. Rent-to-own for properties took off in the 1980s until today where millions of customers around the world choose rent-to-own.
A rent-to-own agreement allows the buyer the option to buy the rental property at a future date. In the meantime, the buyer is also a renter for the property and makes regular payments to the seller.
- Low or no down payment required for the property.
- Able to start on process towards owning a property even if currently unable to qualify for a home loan.
- Able to stay in the property before deciding on property purchase decision.
- Property purchase price locked in at today’s pricing and enjoying future price appreciation.
- Forfeiting money paid for the “option” of buying the property if you decide not to buy.
- Risk of being unable to qualify for a loan at the time that you want to buy the property.
- You are not the owner of the property (yet) and cannot renovate or make any changes without the owner’s approval.
- Property prices may unexpectedly fall lower than the price locked in at today’s pricing.
Other Rent-to-Own Concerns
Rent-to-own has had its fair share of controversy including whether the transaction should be considered a lease or a credit sale. There are cases as well where unprepared buyers are taken advantage or scammed. You need to be careful of the conditions stated in your contract. For example, late payments may actually cost you to lose your right to own property, and property upkeep costs may need to be covered by you.
Rent-to-Own Options in Malaysia
- Open to Malaysian citizens/PR age 18-65 having maximum 1 current home loan with minimum household income of RM5,000 and above.
- Based on Islamic finance lease agreement concept of ijarah.
- No down payment and locks in purchase price of property.
- 3 month rental deposit required.
- Contract period 5 years with option to renew every 3 years (maximum 30 years).
- Rental fixed for first 5 years with 2% annual rent increase after 5th year.
Maybank HouzKEY RTO Options
- Migrate to mortgage facility anytime after 12 month rental period.
- Cash out after 12 month rental period by selling to a 3rd party with gains belonging to the customer.
- Continue paying rental after 5th year with 2% annual rent increase and purchase property after 30 years for RM1.
- Walk away after 5th year with no obligations. Replacement tenant must be found if exit before 5 years.
- Gamuda Land
- Mitraland Group
- Sime Darby Property
- SP Setia
- Rent PR1MA properties for up to 10 years.
- Option to buy at pre-agreed price after 5 or 10 years.
- 3-month rental deposit required.
- Rental rate and payment schedule determined prior to signing rental agreement.
- Rental increases every 3 years.
- If exit scheme, savings refunded after deduction of charges owed to PR1MA.
- Sales moratorium period of 15 years from Sales and Purchase Agreement (SPA) where no transfer of ownership is allowed.
- PR1MAHope gives up to 1 year rental off in event of death or total permanent disability.
PR1MA RTO Options
- Basic RTO: monthly rental + savings placed in Buyer’s Savings Account (BSA) to accumulate towards house value.
- Zero RTO: no savings and buyer needs to apply for financing if decides to buy.
- Bank Islam
- Bank Rakyat
Should I Opt for Rent-to-Own?
You can consider rent-to-own if you are unable (or unwilling) to pay for the down payment BUT you are confident of having the monthly cashflow for the monthly payments.
The difference between a full property purchase down payment is approximately 10% of the property price versus 1-2% for the property price for 3 months rental down payment.
Buying based on RTO is more expensive compared to a traditional housing loan. Expect your monthly rental/RTO payment to be 11-12.5% higher comparatively.
The choices for rent-to-own properties are limited in Malaysia, therefore, you are only able to accept the scheme IF the property is selected for rent-to-own.
Q: Do I have to pay RPGT if you cash out/sell the property?
A: Yes if you cash out within 5 years, Real Property Gains Tax will be applicable.
Q: Can I opt for RTO if I am blacklisted/bankrupt?
A: Unfortunately no.