Vendor finance another home loan option

When banks or even non-conforming lenders won't lend money to a would-be home buyer, vendor finance or a “wrap” mortgage can provide the answer. But the option isn't without its risks for the borrower.

During the recent housing boom, about 300 “wrappers” commenced lending to home buyers at rates of 1 to 2 per cent above conventional lenders. Vendor finance can be likened to lay-by, says one wrapper. The title stays with the vendor and the borrower pays instalments, like rent. The title passes to the purchaser after the final payment is made.

For the lender, the higher risk can be offset by higher returns. For the buyer, some dangers are emerging which have caught the attention of consumer legal services. The major concern is that there's no uniform regulation covering the industry which borrowers could rely on to protect them.