Australians locked out of the mortgage market are being preyed upon by black market housing operators, according to a new report by the Consumer Action Law Centre.The paper, Fringe dwellings: The vendor finance and rent-to-buy housing black market, looks at the types of schemes offered, the dangers they pose and what should be done.

Both rent-to-buy schemes and vendor finance schemes have been lampooned with the Centre saying that they "typically do not result in successful home ownership and in some cases financially destroy hopeful buyers".

"These black market housing schemes promise the Australian dream of home ownership without a bank loan," said Gerard Brody, CEO of Consumer Action. "Compared to a mortgage, these deals are high-cost and extremely risky. We've seen people left much worse off – financially ruined and under unbearable stress."

As well as putting buyers at risk, these schemes also pose a danger to vendors, the report said, especially through poor conduct of intermediary real estate brokers. This includes actions such as misleading advertising, breaching property law, and disappearing or becoming insolvent if things go wrong.

The Centre recommended stronger regulations to curb the risks that came with these types of schemes.

"As Australia faces big questions about housing affordability, it's vital that we crack down on these black market operators wrecking the Australian dream." said Brody.

The report suggested an outright ban on rent-to-buy or lease-option agreements for the residential property market. It also recommended prohibiting 'mortgage wrapping' where the vendor takes out a mortgage on a property once a vendor terms contract is in place with the buyer.

Lastly, the First Home Owners Grant should only be paid on the final settlement of a vendor terms contract once the buyer is actually in a position to own the property, the report said.

"These schemes operate on the fringes of the property market and of the law. We need law reform to end the damage these schemes are doing to people's lives," Brody said. "There are serious gaps and uncertainties in the law when it comes to these deals – people are in a much worse legal position than if they were a renter or a regular homebuyer."