Instalment Contracts
Instalment Contracts (also known as Terms Contracts, or Wraps) is very similar to a normal bank mortgage in that the buyer pays the purchase price, one instalment at a time.
The difference is that the buyer pays the vendor, not a bank.
The payment terms are documented as an Instalment Contract. The buyer pays a deposit and pays the balance purchase price by instalments of principal and interest, usually over 25- 30 years.
An Instalment Contract is a good way for salary earners who have a steady income but low deposit to gain a foothold in the property market.
There is one major difference between purchasing with an Instalment Contract and with a home loan…, the title to the property remains in the name of the vendor until the Instalment Contract is paid out. That is the vendor’s security for payment.
It is different with home loan finance where the title to the property is transferred into the name of the purchaser, and the lender
registers a Mortgage over the title as its security.
Because the buyer is in occupation under the Instalment Contract, he is responsible to pay the outgoings - Council and Water Rates, Strata Levies, Insurance premiums, as well as all maintenance and repairs.
The interest rate on Instalment Contracts is usually set 1 or 2 percentage points above the standard variable bank loan rate. This acts as an incentive for the buyer to refinance as soon as he is able to. Hence, whilst an Instalment Contract is a 25-30 years loan, it is normally paid out earlier.
Usually, the buyer will refinance with a home loan in a 5 to 10 year time frame when they have built up enough equity, or they pay out Instalment Contract when they sell.
Note: Instalment Contracts are not suitable to be used for properties in Victoria or South Australia.