What’s an Instalment Contract?

With the ever increasing price of real estate markets many people experience difficulties obtaining finance to purchase a home. All too often the strict lending criteria of the main financial institutions prevent people securing adequate finance and others, simply cannot afford a large cash deposit required to secure a house sale. This is why vendor finance, a technique for purchasing and selling properties long-established in the residential and commercial real estate arena is quickly re-gaining popularity in residential property markets.

Vendor finance, or as it’s sometimes referred to as instalment contracts or terms finance, is simply finance offered by a seller to finance the sale of a house they have. The terms of the house sale, as the name ‘terms finance’ and ‘vendor finance’ suggest, are defined by the vendor.

Unlike traditional lenders such as banks, vendor financiers are prepared to provide favourable, personalised terms and repayment options to enable potential home buyers to purchase a home. The stipulated terms set by the vendor normally include a lower-than-average deposit and monthly repayments that can be more flexible, making the terms very attractive to people who have previously experienced difficulties securing a mortgage through traditional lending institutions.

A common vendor finance scenario is the seller (or finance provider) offers the house purchaser the opportunity to pay for the house by ‘paying for some now’ in the form of a low deposit, and paying for ‘some later’ by arranging to pay the remaining balance of the house price in agreed instalments.

Vendor finance is not a new concept to Australia, it’s been used since the 1880s when property developers first started to sell-off land. The concept has also been used for decades to help small businesses to buy premises on reduced installment terms whilst the business battles through the first make-or-break years.

Vendor finance applicants are still required to pass some lending conditions, but the lending criteria is often less rigorous than traditional lending institutions. Self-employed workers, new immigrants and those with no savings history or previous bad credit can achieve home ownership through vendor finance.

An example of a vendor finance sale starts when a purchaser gives the seller a $10,000 deposit towards a $370,000 house. The remaining balance of the house price is paid in instalments over the next 30 years at $500 per week and a small weekly fee is also required to cover rates and insurance fees. The purchaser is able to move in straight-away allowing the purchaser to take advantage of any capital gains their home accrues, unlike those who rent.

As purchasers are buying directly from the seller, Vendor finance sales often reduce fees as the middle man, or real estate agents, are removed from the equation.

Some purchasers who use vendor finance maybe paying a slightly higher rate of interest, or a marginally higher house price, but this small premium is often disregarded as the purchaser is gaining access to home ownership