Is vendor finance legal?

Yes. State and federal legislation provide legal frameworks that govern vendor finance in Australia. Purchasing a property where the seller provides finance is legal when conducted correctly. As a rule of thumb, private owners can normally sell their properties through vendor finance legally, but businesses must either carry a real estate licence or a credit licence, depending on the type of transaction being undertaken. However, some argue that current legislation is not adequate to deal with the loopholes and risks associated with vendor finance. If you’re thinking of purchasing or selling property through vendor finance, you should seek a solicitor to run you through the process and legal considerations.

Why would a seller engage in vendor finance?

There are many homeowners and investors who may not immediately need the money that is tied up in their property and therefore don’t mind if it is paid off over time. Like any transaction, the seller will want something in return for their flexibility. It is therefore likely that you will pay a slightly higher price for the property, around 3-7% of the value on the sale date. This is the premium you will pay in return for alternative and flexible short-term finance.

Am I protected if my name isn't registered as the owner?

Although you won’t be the legal owner, you have the option of having your name registered on the title. Your solicitor can lodge a legal document that will prevent the vendor from selling the property without your approval.

What happens if I make repayments late?

If you don’t make your repayments on time, it’s likely that the vendor will also fail to meet their own repayments on their mortgage given that your repayments will most likely form their repayment amount. If this happens, the vendor’s lender may charge late fees or other penalties and the vendor may pass this cost on to you. If you’re experiencing financial hardship and you don’t think you’ll be able to make your repayments, then you should get in touch with the vendor as soon as possible to negotiate a new arrangement or set up a different repayment schedule.

Is there a timeframe in which I need to refinance by?

No. You should be able to refinance with a bank at any time. As soon as you have built up enough equity and a good repayment history, you should refinance and pay out the vendor. You should refinance as soon as possible, as it’s likely that you’ll pay less interest to a lender than you would to the vendor.

Who is responsible for covering repair and maintenance costs?

As the buyer, you are responsible for looking after repairs and maintenance to the property.

How about rates, taxes and insurance?

You need to reimburse the vendor for council rates, water rates, insurance and taxes related to the upkeep of the property.

Can I renovate the property?

Generally, you can conduct cosmetic renovations to the property, such as painting or installing a new kitchen, without seeking the vendor’s permission. However, if you want to make major structural changes to the property, you will normally need to speak to the vendor (and the local council) first.