Often called Terms Sales, Instalment Sales are vendor
finance sales where the vendor (the owner) finances the
purchaser, instead of a bank financing the purchaser. The
purchaser pays a small deposit, moves in, and pays the price
instalments until they are ready to refinance or sell.
The Instalment Sale form of vendor finance is structured
to offer homebuyers a home purchase contract with a built-in
opportunity to build up sufficient equity (a deposit) and a
good track record of payments (creditworthiness) to qualify
for bank finance at a future time.
The vendor has two tasks, which they delegate. The first
is the preparation of a Terms Contract, which is delegated
to a solicitor / property lawyer. The second is a credit
assessment of the purchaser, which is delegated to a
A Terms Contract is a standard Contract for Sale, with
- Like a standard Contract, the purchase price is
fixed up front and does not increase later on. But
instead of the price being paid by a 10% deposit on
signing and the 90% balance price paid a short time
later with bank finance, the purchaser pays a small
deposit of between $10,000 to $20,000 and pays the
balance purchase price by instalments (with interest)
over 15 to 20 years. The interest on the instalments is
the same as the interest rate the banks charge for low
doc loans, because a Terms Contract is form of low doc
loan. This means that the interest rate will be a little
higher than a full doc loan. The instalment amounts are
principal and interest, and can be calculated using a
standard home loan calculator. Usually, the instalments
are paid weekly, but can be paid fortnightly or monthly.
- The purchaser moves in immediately they sign the
Terms Contract and pay the deposit – they pay the price
instalments instead of rent. They also reimburse the
Council Rates, Water Rates and Building Insurance
premiums the vendor pays - which continue to issue in
the vendor’s name because the ownership of the property
– the title - does not transfer to the purchaser until
the full purchase price has been paid. The purchaser is
also responsible to look after the property, in terms of
maintenance and repairs. The purchaser can improve the
property – by doing renovations and making improvements
from painting, to a new kitchen, a bathroom and
landscaping, and keep the benefit of these renovations
- The Terms Contract continues for a term, similar to
a home loan term of up to 30 years. The term is able to
be set shorter if the purchaser has the income to
support higher repayments to shorten the term.
Importantly, the purchaser can refinance the property at
any time – they do not need to wait until the end when
the price is paid in full. Usually, after 5 years, the
buyer has sufficient equity and a good track record of
payments to refinance the vendor finance. Refinancing is
often prompted when a purchaser wants to borrow against
the property to fund an extension, a new garage or a
swimming pool. As each year passes, the purchaser finds
it easier to refinance because they are paying down the
price. They can boost their equity in the property by
making improvements. The purchaser can also sell at any
time, provided the sale price covers the balance
purchase price outstanding.
Because a Terms Contract is treated as a credit contract
at law, then the purchaser must be assessed as creditworthy
by a credit professional – the holder of an Australian
Credit Licence. Mortgage Brokers not only hold Credit
Licence, but they are experts in assessing borrowers, and
know all about the responsible credit guidelines that must
be followed. The credit professional will assess (a) if the
purchaser’s income and financials will support the proposed
instalment payments, and (b) if all goes well in terms of
the payments, how many years they will need before being
able to refinance. The credit professional will issue a
letter / email to the seller to confirm their assessment and
will produce the vetting documents needed to comply with the
Consumer Credit Code. The purchaser pays for this
If the purchaser checks out, the solicitor / property lawyer
acting for the vendor prepares the Terms Contract. The
purchaser obtains independent legal advice before they sign.
The Terms Contract is managed by a vendor finance manager,
who holds an Australian credit Licence. They collect the
instalment payments, pay the property mortgage, the council
and water rates, the insurance premiums, and deposit the
surplus into the owner’s account. They issue the statements
required under the National Credit Code, look after hardship
situations, and calculate the payout figure when the
Contract is refinanced or the property is sold.
The property is sold at a price of $350,000, with a
deposit of $15,000 (the up front money), and with the
balance price of $335,000 vendor financed and payable by
instalments of $537 per week over the next 30 years. In this
example, the instalment amount consists of both principal
and interest, and the interest rate is assumed to be 7%
per annum. The buyer moves in immediately. The buyer pays
$65 per week to the owner to reimburse all rates and,
insurances. This illustration is an instalment sales form of vendor
finance because the price payable is payable by instalments.
How do Instalment Sales work
for owners and investors?
- Owners and investors who use the Instalment Sale
form of vendor finance are willing to delay receipt of
the price, as a trade-off to receiving the price they
want. Instalment Sale vendor finance is not a sale based
on price - it is a sale based on price payment terms
which are attractive to the buyer. Owners and investors
who use instalment sales are the opposite of sellers who
sell on the price - sellers on price are usually forced
to discount the price for a quick sale.
- Other owners and investors who use the Instalment
Sale form of vendor finance do so because banks are
unwilling to lend money to a buyer because the property
is in a small town or a rural area, or because the
property is a shop, factory or office. Most banks define
a ‘small town’ as having less than 10,000 residents!
- Yet other owners and investors who use the
Instalment Sale form of vendor finance like the higher
rate of return on money invested that is available when
they vendor finance the purchaser. They like to keep the
profit that banks make on lending, for themselves!
- Owners and investors who use the Instalment Sale
form of vendor finance are fully secured. This is
because the legal title to the property (i.e. ownership)
remains in the name of the owner and investor until theTerms
Contract has been paid out. This provides
owners and investors with excellent security in the
event of a default – better than a mortgage security
which is what banks hold!
How do Instalment Sales work
- If the buyer’s needs are to buy a home and be able
to move in straight away, then an Own Your Home – No
Bank Loans advertisement will appeal to the buyer.
- In this case, the buyer has chosen the form of
vendor finance known as the Instalment Sale also
known as Terms Finance. Instalment Sales are documented
in the form of Terms Contracts. Contracts are
recognised as legally valid throughout Australia (except
in South Australia) and New Zealand.
- A buyer who chooses an Instalment Sale will be
buying the property in the usual way, with one
significant difference - instead of the buyer needing to
look around for a bank loan to pay for the price for the
property, the seller finances the price for the property
along the same lines as a bank would provide. That is
why it is called vendor finance.
- There is no mystery about the many reasons a buyer
might choose the Instalment Sale form of vendor finance.
These reasons include:
- having a deposit which is too small for a loan;
- not having a savings history with a bank for a loan;
- not having a permanent job for long enough for a loan;
- needing to have a job history of 12 to 24 months to
qualify for a loan;
- being self-employed – running your own business;
- needing to re-establish after a financial set-back;
- needing to wait for 2 years to pass after a black mark
has been placed on a credit file, before being accepted
as a good credit risk by the banking system;
- not liking the banking system – prefer to deal with
someone they can talk to.
- The Terms Contract is mostly along these lines
- the buyer pays a deposit and then pays weekly,
fortnightly or monthly instalments to the seller. The
instalment amounts will be set to pay the price for the
property over 25 or 30 years, just like a bank loan.
- The buyer is encouraged to repay the vendor finance
by taking out a bank loan at the 3 year mark (rather
than taking advantage of the 30 year term) because bank
finance will be cheaper. Vendor finance is offered at a
‘low doc’ interest rate which means that the interest
rate payable is set at a 1%, 2% or even 3% above the
best interest rate offered by a bank for a home loan
product. The seller will use the interest rate payable
on their mortgage over the property as the benchmark.
- The great advantage that a buyer has when choosing
to buy with vendor finance is that the buyer can move in
straight away, compared with buying in the usual way
with a bank loan, which can often take two to three
- When the buyer moves in under an Terms
Contract, they become responsible to pay for council
rates, water rates and insurance, and also are
responsible for all maintenance and repairs. This is
exactly the same as buying in the standard way with a
bank loan. Usually, the amount to be paid for council
rates, water rates and insurance is calculated and
reimbursed to the seller (because the rate notices are
issued to the seller) and paid along with the price
- There are embellishments on this form of vendor
finance, such as U fix, you own, U profit which
is suitable for ‘handyman’ buyers who have trades skills
and who can renovate houses. They trade their time and
skills for a price credit, which works for buyer and
seller by improving the value of the house.
If Instalment Sales work the
same way as a bank loan, why are they better than a bank
loan for a purchaser?
Although Instalment Sales work the same way as a bank
loan, they are better for a purchaser because they are much
This is because the vendor sets the vendor finance payment
terms to pay the purchase price for the property, to suit
the purchaser’s circumstances, rather than requiring the
purchaser to fit within a standard home loan product that
the bank or finance company offers.
Of course banks try to meet this ‘standard home loan’
criticism by offering a choice of home loan products, but
the so-called choice is like looking at a supermarket shelf
stocked with cheddar cheeses, the cheddars are the same
cheese with different packaging, ignoring the fact that
there are cheeses other than cheddar such as edam, camembert
(and the other 670 well known varieties of cheese) which
offer real choices!
Mainstream lenders have a loan approval process which is to
put borrowers through hoops to qualify for their standard
home loan products. Mainstream lenders have rigid loan
approval criteria which means that they will decline loans
to borrowers with low deposits, to borrowers with a credit
blemish and will tell borrowers who are self employed that
they are only eligible for a loan of 65% of value, at most,
up to 80% of value!
While lenders are entitled to set whatever loan approval
criteria they like, there are many potential borrowers who
fall outside these criteria and whose employment / self
employed income levels make them good prospects, if a little
flexibility is available.
Vendor financiers have the flexibility to offer terms
to suit all kinds of purchasers, such as –
- Vendor financiers can offer low introductory
payments, which can rise over time to match rising
- Vendor financiers can offer low deposits, and even
accept the First Home Owner’s Grant as part payment of
- Vendor financiers will allow purchasers to improve
the value of the home, and if the home is sold as U
buy, U fix, vendor financiers will offer to credit a
pre-agreed amount as the value of the improvements
towards the deposit.
- Vendor financiers will offer a fixed sale price up
front, while the purchaser builds their creditworthiness
to qualify for a loan refinance in the knowledge that
the price will not change.
- Vendor financiers will allow additional payments to
be made to pay down the price more quickly, without
The seventeen things you must
know about Instalment Sales
- An Instalment Contract is a contract in which the
vendor (the seller) agrees to sell the property to the
purchaser (the buyer) at a price agreed when entering
into the contract, and agrees to lend the purchaser the
price payable, less the deposit paid.
- It is documented by way of a Standard Contract for
Sale, with changes made to the completion period, to
allow for immediate possession, to provide terms for
payment of the price and for immediate possession. The
Contract contains extra clauses to ‘supercharge’ the
Standard Contract for Sale, namely an Instalment Payment
and Licence to Occupy Schedule & a National Consumer
Credit Code Disclosure Statement.
- The completion period is not the standard 30 days
(in Queensland), 42 days (in New South Wales), 56 days
(in Western Australia) 60 days (in Victoria), it is far
longer – it is usually a delayed completion period of up
to 30 years.
- Purchasers are able to pay out the amount of the
price owing under the Terms Contract at any time
before the end of the completion period. The purchaser
is able to do so by refinancing with a lender or by
selling the property.
- The sale price is fixed up front. There are no CPI
adjustments or market value adjustments. There is no
‘shared equity’ which is a loan product promoted by some
lenders where the lender takes a share of the capital
gain in the property.
- A small deposit is paid which is less than the standard 10%
deposit payable under a standard Contract for
- The balance price is paid by instalments, on a
weekly / fortnightly / or monthly basis. The instalments
usually consist of principal and interest, and the
amounts payable are calculated to pay out the contract
price over the completion period of the Contract. A
direct debit authority or a paymaster’s authority is put
into place for the payment of the instalments.
- The price instalments are almost always principal
and interest payments designed to pay out the whole
amount over the term – the interest rate is set by
reference to the interest rate payable on the mortgage
that the vendor has taken out upon the property. The
interest rate, and therefore the instalment amount, is
subject to variation by giving 20 days notice.
- Purchasers are able to move in to occupation
immediately. It is not a residential tenancy - the
Purchasers move in under a licence to occupy which is
contained in the Terms Contract.
- Purchasers look after all maintenance & repairs. So
when the water heater starts leaking and needs to be
replaced, or the fences start to lean, the purchaser is
- Purchasers reimburse the vendor for outgoings in the
nature of council rates, water rates and insurance
premiums. Usually, the reimbursements for outgoings will
be calculated in this way – the amount payable over a
year is added up, then it is divided by 52 if the
payments are weekly, by 26 if the payments are
fortnightly, or by12 if the payments are monthly.
- Most Purchasers refinance (cash out) the Contract
after 2 or 3 years – after they have built “equity” and
a track record of payments – they have “crossed the
bridge into the banking system” where the interest rates
are lower and where they can use their “home equity” to
borrow against the home to build an extension, a
swimming pool, and so forth. Some sell the home for a
- The title to the property remains in the name of the
vendor as owner until the Terms Contract is fully
paid out. This provides the vendor with “security’ for
the payment of the price, particularly in the light of
the fact that the Purchasers pay a smaller deposit than
the usual 10% deposit.
- Purchasers protect their interest in the property by
being in possession, and by registering a Caveat on the
title to the property to protect their equitable
interest in the property.
- Because the Terms Contract is a Credit
Contract, the purchasers have all the protection that
the National Consumer Credit Code provides.
- The vendor as owner is entitled to retain their
current mortgage over the property. If the owner desires
to refinance, then the amount of the refinance must be
less than the amount owed by the purchasers.
- The vendor continues to be entitled to depreciation
allowances and other tax benefits on the property
because they remain the owner of the property until the
purchasers cash out the contract.
Do Terms Contracts
continue for the whole term?
While Terms Contracts are written up for terms of 25
or 30 years, they are not intended to go on for many years,
nor do they go on for many years in practice.
Terms Contracts should be regarded as the First
Stepping Stone along the path of home ownership for a
purchaser, the intention being that they be paid out as soon
as the purchaser has built up sufficient equity and a
creditworthy track record of payments to refinance the
vendor finance with a mainstream lending institution.
Some purchasers sell the property, instead of refinancing,
to take advantage of the capital gain from the improvements
they have made to the property, or an increase in house
prices in their suburb or town.
The vendor can build in incentives into the Terms
Contract to encourage purchasers to refinance at the 5 year mark. The main incentive is that at the
year mark, the interest rate payable increases meaning that
the interest rate will be cheaper if the purchasers
refinance with an external financier than the interest rate
that is payable under to the vendor under the Terms
What practical issues do
purchasers need to deal with under an Instalment Sale?
- Purchasers are liable to pay stamp duty on the full
purchase price payable under the Terms Contract,
often long before completion. In most States, generous
exemptions from the payment of stamp duty exist for
First Home Purchasers, which relieves them of the burden
of paying stamp duty. In other States, First Home
Purchasers, and in all States, Second Home Purchasers
need to plan to pay stamp duty. As a rule of thumb, the
stamp duty payable is 3% of the price.
- Purchasers are responsible to pay all Council Rates,
Water Rates, and although they are able to take out
their own insurance, will be asked to pay for the
vendor’s building insurance. Most vendors simplify this
responsibility by setting an amount to be paid along
with the instalments, to cover rates and insurance
- The instalments of the price payable under the
Terms Contract are subject to variation, when the
interest rate varies on the underlying mortgage on the
property. The interest rate on the property mortgage is
known as the indicator rate, and when the lender varies
the indicator rate for the vendor’s mortgage, the vendor
varies the instalments payable under the Terms
Contract by giving 20 days notice to the purchasers of
the new payment amount to reflect this variation.
What practical issues does
the vendor need to deal with under an Instalment Sale?
- The vendor is responsible to comply with the
National Consumer Credit Code, in terms of assessment of
purchasers as being suitable to be provided with credit,
which is called following responsible lending
guidelines, in terms of giving statements of account
every 6 months, and in terms of dealing with defaults
and hardship applications. Vendors who lack skills or
experience in the assessment of purchasers should have a
mortgage broker or Australian Credit Licence Holder
assist them. Vendors who lack skills in monitoring
payments or in dealing with defaults and hardship
applications should have a loan manager assist them.
- The statements of account take the same form as the
statement that your lender/mortgagee provides every 6
months – it records interest and charges as debits, and
receipts as credits, and has a running balance. There is
a separate ledger kept for council rates, water rates
and insurance receipts and payments.
- The vendor is exempt from land tax in NSW, in
Queensland and in Victoria from the date that
the purchaser takes possession and while an Terms
Contact is current for the property.
- The payment of the vendor finance instalments and
the reimbursement of rates and insurance premiums is
made using a direct debit system, and is usually outsourced
to a loan manager to reduce the administrative burden.
- Purchasers are liable to pay State stamp duty, which
is also known as a property transfer tax, on TermsContracts. A vendors is not liable to pay the stamp duty
if a purchaser fails to pay it. As a rule,
purchasers who have owned a home in the past will are
liable to pay stamp duty. When stamp duty is payable
differs between the States – in Queensland, stamp duty
is payable within one month after the Terms
Contract is entered into, in NSW the time period is
three months, while in Victoria, Stamp duty is not
payable until after the whole of the price is
paid. If stamp duty is not paid when it falls due for
payment, interest is payable on the stamp duty (at a
penalty rate) until the stamp duty is paid.
What is the legal basis for
The legal basis is found in the National Consumer Credit
Code, which is part of the National Consumer Credit
Protection Act, 2009, being an Act of the Commonwealth
Government. The Act makes clear that Terms Contracts
are not only legal in all Australian States and Territories,
but also that they are covered by the National Consumer
Credit Code. This is a summary of section 10
Section 10 National Consumer Credit Code 2010
A contract is an instalment contract if the
(i) Is entitled to possession of
the property before receiving the transfer of title;
(ii) Is paying the price by instalments
before receiving the transfer of title; and
(iii) Is paying a price which totals more than
the cash price
Because an instalment contract is a credit contract
(i) The Owner must comply with the
National Consumer Credit Code in terms
of vetting purchasers and giving a
Disclosure Statement; and
(ii) If the Owner issues more than
a handful of instalment contracts – and
carries on the business of providing
credit, the Owner must obtain a
National Credit Licence.