Vendor Finance: The Pros and Cons

Next Step: Discuss vendor finance with an agent today. Compare top local agents in your area.

What is Vendor Finance?

Vendor finance is a private arrangement where the seller provides finance to the buyer to purchase the property. This can be an option when buyers can’t obtain a traditional bank loan, often due to being self-employed, having irregular income, or having a less-than-perfect credit history.

Instead of receiving the full sale price upfront, the seller agrees to accept payments over time. The agreement usually includes details such as the purchase price, interest rate, repayment schedule, and what happens if the buyer defaults.

Unlike a traditional mortgage, vendor finance doesn’t always involve a financial institution. Because of this, it carries higher risks for both parties and less consumer protection. However, it can be structured in several different ways to suit the situation.

Types of Vendor Finance

There are three common types of vendor finance arrangements used in Australia:

1. Terms Finance (or Wrap-Around Loan)

Under a wrap-around loan, the seller keeps their existing home loan with the bank but enters a separate agreement with the buyer. The buyer pays instalments to the seller, often at a slightly higher interest rate. The seller continues making their mortgage payments to the bank using those funds.

For example, if the bank charges the seller 5% interest, but the buyer pays 7%, the seller earns a 2% profit margin. The property title typically remains in the seller’s name until the buyer refinances or pays off the full balance.

2. Vendor-Financed Deposit

In this case, the seller lends the buyer part of the deposit (often around 20%), and the buyer takes out a regular mortgage with a bank for the remaining 80%. The buyer will have two loans, one from the bank and one from the vendor, which they aim to consolidate once they can refinance.

This arrangement allows buyers who have limited savings but stable income to enter the market sooner.

3. Lease Option or Rent-to-Buy Agreement

Here, the buyer rents the property at an above-market rate, with an option to purchase it later for an agreed price. Part of the rent may go toward the future purchase price. However, ownership does not transfer until the buyer pays the full amount or refinances the mortgage in their name.

This setup is often marketed as a “pathway to ownership” but comes with high risks if payments are missed.

Why Sell With Vendor Finance

Selling your home with vendor finance means you, as the seller, agree to act as the lender for the buyer. Instead of receiving the full payment upfront, the buyer pays you over time.
For some homeowners, especially when the market is slow or buyers are struggling to get loans, this can be a way to sell faster and on your terms.

Here’s why some sellers consider it:

1. Faster sale in a slow market: Vendor finance attracts a wider pool of buyers, including self-employed people or those who can afford repayments but don’t qualify for a bank loan right now.
2. Better selling price: Instead of lowering your price to get offers, you can maintain or even increase your asking price by offering flexible payment options.
3. More interest in your property: When other listings look the same, offering finance makes yours stand out.
4. Extra income potential: You may earn interest on the money you lend to the buyer.
5. Helping someone into homeownership: Some sellers like the idea of helping a family buy their first home.

However, remember the downside is that you won’t receive the full amount straight away. You’ll get the money gradually, and there’s always a chance the buyer could default. That’s why this type of arrangement works best if you have no urgent need for the sale proceeds and are financially stable

How to Qualify for Vendor Finance

The Cons of Vendor Finance

Vendor finance also comes with serious risks, which is why it’s restricted or banned in some parts of Australia.

For Sellers

• You don’t get your full money immediately.
• If the buyer stops paying, you may still owe your bank while chasing the buyer legally.
• Complex paperwork: Contracts must comply with lending laws and property acts.
• Tax and accounting issues: You may owe tax on interest income or have GST implications.
• Emotional stress: Managing a long-term repayment arrangement can become draining.

For Buyers

• Higher repayments and interest rates: Vendor finance often costs more than normal loans.
• Less legal protection: These agreements may fall outside normal credit laws.
• Risk of losing all payments: If you default, you might lose your deposit and the home.
• Harder to refinance later: If the home loses value or your income changes, banks might say no.
• Illegal in some states: In Victoria and South Australia, vendor finance and rent-to-buy are banned.

As Consumer Action Law Centre and ASIC’s Moneysmart warn, vendor finance is a high-risk path for both buyers and sellers and should only be entered after professional advice.

How Sellers Can Minimise Risk

If you’re a seller considering vendor finance, take every possible step to protect yourself.

Here’s how to minimise risk:

1. Hire a solicitor who specialises in property and vendor finance law.
2. Do not use template agreements from the internet. Every deal is unique.
3. Run buyer checks: Ask for payslips, ABNs, or accountant letters.
4. Keep control of the title until the buyer finishes payments.
5. Require buyer’s legal sign-off: Ensure they get independent legal advice.
6. Understand your obligations: Keep your own mortgage in good standing.
7. Use written documentation for everything.
8. Check state regulations: What’s legal in NSW may be illegal in Victoria.

If things go wrong, for example, if the buyer defaults, having the right documents and legal structure gives you the best chance to recover your losses quickly and fairly.

How Buyers Can Minimise Risk

Vendor finance may seem like a fast track to buying a home, but it requires discipline and awareness.

Here are ways to protect yourself:

1. Get your own solicitor to review the contract before signing.
2. Understand every clause, especially what happens if you miss a payment.
3. Check the seller’s mortgage: Ensure they’re up to date and not behind.
4. Budget realistically: Don’t agree to payments that leave no buffer for bills or emergencies.
5. Plan for refinancing: Work with a mortgage broker early to know when you’ll qualify for a bank loan.
6. Confirm who pays what: Council rates, insurance, and maintenance must be clearly assigned.
7. Avoid banned arrangements: In Victoria and SA, rent-to-buy and vendor finance are not legal.
8. Keep good financial habits: Pay on time, save for refinance, and keep your credit clean.

Remember, once you default, you can lose your deposit, the home, and all payments made. So make sure you can genuinely afford the agreement before signing anything.

What is included in a vendor finance contract?

Every vendor finance agreement is different, as they are privately negotiated. Here are some terms that are typically included:

• Loan amount
• Loan term
• Frequency of repayments
• Instalment amounts
• Date the first instalment is payable
• Lump sum repayments (if any), how much and when?
• Interest free period (if any)
• Interest rate on loan amount

What Costs Are Involved

Both buyers and sellers face extra costs in a vendor finance arrangement compared to a standard sale.

For Sellers

• Legal fees: Higher than usual, as contracts must be carefully written.
• Ongoing mortgage repayments: You must keep paying your own lender if you still have a loan.
• Insurance: You’ll likely need to keep your own policy until ownership transfers.
• Tax: Interest income may be taxable, ask your accountant.
• Default risk costs: Legal fees if the buyer stops paying.

For Buyers

• Higher interest rates: Typically above bank rates.
• Larger total repayment: Because you pay over a longer period.
• Legal costs: You’ll need your own solicitor.
• Stamp duty: Same as a regular purchase, based on property value and location.
• Refinance costs: When you move to a bank loan later.

Overall, vendor finance can be more expensive in the long run than getting a normal home loan. Buyers should check government options like the Home Guarantee Scheme or First Home Owner Grant (like the $30,000 HFOG in Queensland) before choosing vendor finance.

Is Vendor Finance Legal?

Yes, it is currently legal in most of Australia, but this may change in the future.

Victoria

In 2019, the Parliament passed a bill officially banning vendor finance schemes. Rent-to-buy and vendor finance banned since 2019 under Sale of Land Amendment Act.

South Australia

Vendor finance is illegal in South Australia.

Rest of Australia

All other states allow vendor finance agreements. However, due to their risky nature, more states may follow suit and ban these schemes.

The Consumer Action Law Centre notes that these schemes are “extremely complex and often detrimental to buyers and inexperienced sellers.” Always get legal advice before proceeding, even if it’s technically legal in your state.

What Other Options Exist?

Due to the level of risk associated with vendor finance, it is a good idea for sellers and buyers to exhaust all other options before entering into a vendor finance arrangement.

Other Options for Sellers

If you’re struggling to attract buyers, you don’t have to turn to vendor finance straight away. There are safer and simpler ways to generate more interest:

1. Reassess your pricing. Talk to your agent about adjusting to current market conditions.
2. Upgrade your marketing. Invest in better photography, video tours, and premium listings.
3. Stage your home. Professionally styled homes sell faster and often for more money.
4. Change agents. A more experienced agent may have stronger buyer networks.
5. Wait for the right market. If possible, pause and relist when demand improves.
6. Rent your property temporarily. Generate income while waiting for better conditions.

Each of these strategies comes with lower risk than vendor finance and still puts you in control of your sale.

Other Options for Buyers

Many potential buyers lack a deposit when they start looking for a home. This doesn’t mean you can’t get a home loan, and resorting to vendor finance may hurt in the long run. Here are some options that might work for you if you have lower savings or no deposit:

• Guarantor loan
  A family member provides a guarantee, which is secured on their own home loan.
• Equity loan
  You can refinance your existing loan to use equity as a deposit.
• First Home Loan Deposit Scheme
  You may qualify for a home loan with only a 5% deposit. The government acts as the mortgage insurer, which saves you money on lenders mortgage insurance.
• Gift as a deposit
  Some lenders will accept a deposit that was given as a gift instead of saved up by the purchaser.
• Personal loan as a deposit
  High income earners with a good credit history may be able to get a personal loan to cover the deposit. However, you must still have 5% of the deposit saved.

Is Vendor Finance the Right Choice?

If you’re considering vendor finance or want to discuss other options for selling or buying a home, speaking to an agent is a great place to start. An experienced agent can help you find an option that’s right for you. Compare your local agents today.