Investing with low or no deposit – Vendor financing

The second part of this blog aims to provide investors with an understanding of another low deposit option available to them – vendor financing.

A big issue for most investors when first starting out is access to bank finance. Even with a decent deposit it can be difficult to meet the banks’ criteria.  If you have a less-than-perfect credit history, are self-employed or new to the country, then you will find dealing with the banks even more challenging.

Many people are unfamiliar with vendor finance but it has in fact been used in Australia for over a century and while it is increasing in popularity, it still flies under the radar of most investors.

No bank finance needed

Put simply, vendor finance (also referred to as seller finance or owner finance) is when the seller of the property makes the financial arrangement direct with the buyer – no bank loan required! 

Vendor financiers provide a more personal, tailored service focusing on the buyer’s capability to make regular payments, rather than their capacity to demonstrate a savings history, assets etc.

It is a popular service offered by developers who want to increase their pool of prospective buyers by offering more flexible finance options.  Vendor financiers will often lend 90 to 100% of the purchase price (LMI will still be payable though if you borrow more than 80%) which makes properties offered under this scheme attractive low deposit options.

The way vendor finance works can be compared to a lease-to-own structure; you make your repayments to the seller and the property becomes legally yours when all payments have been made.  You can rent it out, renovate etc but the title to the property will remain in the seller’s name until you have paid off the property and met any other contractual obligations.

A bridging strategy to the banks

For this reason, vendor finance is not generally considered a long term option and is typically used as a bridging strategy. It allows investors to get their foot in the door, secure a property and then look to refinance with a bank (thereby paying off the vendor finance and securing the title to the property) in two to three years when they have established a payment history.

Good property selection means many investors will have generated decent equity in the property over those initial years putting them in a much better position with the banks.

Another point to remember with vendor financing is that it is usually provided at a higher interest rate to bank finance.  This is less of an issue in our current super low rate environment but remain an additional motive for refinancing.


Both the seller and the investor are protected against certain risks under a vendor finance arrangement. The vendor cannot sell the property or borrow against it without your knowledge, while the vendor reserves the right to take legal action and terminate the contract if you breach any of the contract conditions.

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Hi Ryan.
I am looking at purchasing a house some were in Headland that has a long lease in place and a great return, as i suppose everyone is. I am not new to investing as this purchase will be my forth property. I want to buy into Headland weather it be Port or South as soon as possible but i am currently tied up at the moment as i am building a property in Broome which is due for completion mid to late Nov. Broome will definetly be positive geared on my intrest only loan i have set up. I also have another positive geared property in the western suburbs of sydney. I want a nice, new great returning long lease Headland property to add to my propety portfolio. I work in the oil and gas industry and have lived in Towns such as Karratha and know what the industry can do for Property. I noticed the section on Vendor financing and this intrigued me as have heard little about this and want to get something as soon as possible and wondered if this was an option for myself, as i doubt the banks will loan to me whilst still constructing a house.
I look forward to hearing back from you.

Regards Aaron

Comment by Aaron Peverell on October 8, 2013 at 9:39 pm

Hi Ryan,

Correct me if I am wrong. The vendor finance option is also depending on the seller that if they are willing to wait or if they need to make the profit and move on to other property investment?

The points that you've made in your article above are very spot on. In fact I was just drop off my offer to purchase my first possitive geared property at South Hedland last week due to the same scenario. The bank just say no.

Do you think I can find some good property with the seller happy to go for vendor financing option so I can get into the possitive geared property market (for the first time) and I am planned to pay off the new property before end of next year? (By doing loan transfer with my existing home of similar loan amount)

Comment by Eric Soh on October 8, 2013 at 11:34 pm

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