How to Rent-to-Own in Ontario

With today’s housing prices going through the roof in many city centers across Canada, it can be really tough for the average Canadian to be able to afford a home. Particularly in markets such as Toronto, Vancouver, and Montreal, where housing prices have been increasing by large amounts over the past few years, being able to afford the listing price has proven to be out-of-reach for many hard-working Canadians.

To learn more about the affordable housing crisis in Canada, click here.

Getting approved for mortgages has also become somewhat challenging, with lenders tightening the nooses on lending standards. Lenders have adopted more stringent practices when it comes to determining whether or not borrowers should be approved for mortgages. Despite mortgage rates being as low as they have been over the past few years, home loans are still challenging to get approved for given the high ticket prices for homes on the market along with the strict lending criteria.

So, what’s a homebuyer hopeful to do? Luckily, there are other options to tap into to make owning a home a reality, like rent-to-own. This is a creative alternative to buying a home and is a great way to get finally become a homeowner.

But what exactly is ‘rent-to-own‘ and how does it work?

How Does Rent-to-Own Work in Ontario?

A rent-to-own arrangement is one in which you pay rent every month to the owner/landlord, just like you would as a tenant. However, with a rent to own program, a portion of the rent you pay goes towards your down payment for the purchase if you buy the home down the line. In Ontario, a rent-to-own program gives you the opportunity to grow your down payment while living in the home as if it was your own.

Rent-to-own programs in Ontario offer homebuyers the chance to be proactive in their purchasing endeavours and take steps to become homeowners despite many obstacles that may have prevented them from buying the conventional way. Poor credit and insufficient funds for a down payment don’t have to be hurdles that prevent you from finally having your name on title of a property.

Rent-to-Own Ontario Laws

According to Ontario law, two agreements must be entered between you (the buyer) and the landlord: the rent-to-own “option to purchase” agreement and “lease agreement.” Both contracts will need to be signed before access is given to the property, much like a typical lease agreement or purchase agreement in a traditional lease or purchase scenario, respectively.

There are certain terms within these agreements that are worth emphasizing. For instance, the lease term is an essential component of the rent-to-own contract and specifies the fixed term that you will be leasing the property from the landlord or company. Generally speaking, lease terms tend to last anywhere from three to five years in length, depending on the specific situation.

The duration of the lease term should give you enough time to repair your credit (if necessary), putting you in a much better position to get approved for a conventional mortgage the traditional way. At the same time, it gives lots of time for you to accumulate a sizable down payment amount for you to secure a traditional mortgage in the future.  

Rent-to-Own Properties Ontario

Just about every type of property that you would normally find on the market can be involved in a rent-to-own arrangement. Whether it’s a single-family home, semi-detached, or townhouse, various types of housing could potentially be a rent-to-own property.

It’s important to understand that, in addition to the obvious advantages of a rent-to-own agreement, there are also some pitfalls too, including the following:

• If you don’t end up buying the home, you would lose all the money that would have gone towards the down payment and therefore the equity in the property;
• You don’t have as much control over the property since it’s not yours, so you might not be able to make any changes to it that you would like while living there;
• If the value of the property falls by the point when it’s time to exercise the right to purchase, you may not be able to renegotiate a lower price;
• If you don’t pay your rent on time, you could lose your right to purchase;
• There may be issues with the house that you’re unaware of until you buy it;
• You could be the victim of a rent-to-own scam if you don’t do your due diligence.

Be sure to scope out the program in great detail and get sound advice before signing a rent-to-own contract.

Rent-to-Own Agreement Ontario

Ideally, you should seek counsel from an independent legal advisor who can guide you through the rent-to-own contract before you sign on the dotted line.

In addition to the term of the agreement as mentioned earlier, other details of the rent-to-own agreement include:

• Rent amount
• Rent payment due dates
• How rent is to be paid
• Date to legally take possession of the property
• Contract expiry date
• Who is responsible for paying for utilities
• Final purchase price of the property
• Window of opportunity to purchase
• How much of the rent goes toward the down payment
• About of down payment required

Once the term of your agreement is up (or even beforehand under certain circumstances), you have the option to purchase the property you’ve been living in. Since you have the opportunity to exercise the right to purchase, you must sign the option to purchase agreement when signing a rent-to-own agreement in Ontario.

The option to purchase agreement provides you with the power to purchase the property from the landlord or rent-to-own company, which will obligate the landlord to sell the property to you under the law if you choose to take advantage of this option.

Can you use a credit card to pay your rent? Find out here.

Final Thoughts

If coming up with a sizable down payment is difficult and your credit is suffering, you might find it tough to buy a home the traditional way. However, programs like rent-to-own can provide you with an opportunity to become a homeowner when obstacles get in the way.

Click here to learn how you can save up for a down payment.

That said, it’s important that you fully understand the rent-to-own agreements that are required in Ontario before you get involved with such an arrangement. Be sure to speak with a mortgage specialist and financial advisor before you take the next steps.