With today’s housing prices going through the roof in many city centers across Canada, it can be 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.
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 finally become a homeowner.
But what exactly is ‘rent-to-own‘ and how does it work?
What Is A Rent-To-Own Program In Ontario?
A rent-to-own program allows those in Ontario to rent a home with the option to buy. These programs offer homebuyers the chance to be proactive in their purchasing endeavours. Despite any obstacles that may have prevented them from buying the conventional way.
Poor credit and insufficient funds for a down payment right now don’t have to be hurdles that prevent you from finally having your name on the property title.
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 or landlord. Just like you would as a tenant. However, with a rent-to-own program, a portion of the rent you pay goes toward your down payment, if you buy the home down the line. In Ontario, a rent-to-own program allows you to grow your down payment, while living in the home as if it were your own.
Two Rent-To-Own Options In Ontario
There are two different rent-to-own agreements you may choose from, including the following:
Lease-Option Agreement
Also referred to as an “option to purchase” agreement, a lease-option agreement gives you the option to buy the property at a future date. However, you’re not required to make the purchase.
This option gives you the flexibility to make your decision of whether or not to buy the home when the agreement comes to an end. You will not be penalized if you choose not to purchase the property at the end of the lease.
Lease-Purchase Agreement
Unlike the lease-option agreement, a lease-purchase agreement does not give you the flexibility to choose whether or not to buy the home. Instead, you are obligated to go through with a purchase by the end of the lease agreement. Otherwise, you may be penalized.
Example Of A Rent-To-Own Program In Ontario
To help you understand how a rent-to-own program in Ontario works, let’s illustrate using an example.
- Agreed purchase price: $500,000
- Deposit (2.5%): $12,500
- Lease term: 3 years
- Outstanding balance after lease end: $500,000 – $12,500 = $487,500
- Down payment required (5%): $500,000 x 5% = $25,000
- Monthly rent: $2,000
- Monthly amount going toward down payment: $800
- Down payment saved by lease end: $800 x 36 months = $28,800
- Amount remaining on mortgage after lease end: $487,500 – $28,800 = $458,700
According to this example, you would have invested $28,800 toward the down payment of the home by the end of the 3-year lease. However, it’s important to note that you’ve also spent $43,200 in rent ($2,000 – $800/month x 36 months). This could have been put toward the original mortgage without taking the rent-to-own route.
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 the “lease agreement.” Both contracts need to be signed before access is given to the property. Similar to 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 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. Ideally, this will put 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.
What Types Of Properties Are Available Under The 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.
Advantages Of A Rent-To-Own In Ontario
Rent-to-own programs in Ontario can provide you with several advantages, including:
You Can Save For A Down Payment
One of the biggest perks of a rent-to-own agreement is that you don’t need to come up with a big chunk of money upfront for a down payment. Instead, the monthly amount you contribute goes toward the down payment for the property, less the rent portion. This allows you to get into the real estate market sooner without having to save for years building a sizable down payment.
Increase Your Credit Score And Chances Of Qualifying For A Mortgage
With every timely payment you make, it may help you build your credit score. With better credit, you’ll have more financial products available to you in the future, including a conventional mortgage.
Lock In A Purchase Price
Generally speaking, the value of real estate increases over time. With a rent-to-own agreement, you can lock in at an agreed-upon price today. If the value of the home exceeds this amount by the end of the lease, you’ll be able to buy the home for a lower price than what the future market dictates. However, keep in mind that this feature is a double-edged sword. There could be a chance that the value of the home may be lower in the future than what you agreed to pay for it by the time your lease expires. If it’s appraised at a lower value by the lender, you might also need to put more down on the property.
Disadvantages Of Rent-To-Own In Ontario
It’s important to understand that, in addition to the obvious advantages of a rent-to-own agreement, there are also some pitfalls, including the following:
- You Can Lose Your Money – If you don’t end up buying the home, you would lose all the money that would have gone toward the down payment and therefore the equity in the property.
- Locked In Price – 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;
- Missed Payments Can Make The Deal Fall Through – If you don’t pay your rent on time, you could lose your right to purchase;
- Less Control Over The Property – You don’t have as much control over the property since it’s not yours. You may not be able to make any changes to it while living there before you buy it. Moreover, there may be issues with the house that you’re unaware of until you buy it.
Rent-To-Own Scams In Ontario
Unfortunately, some consumers have fallen victim to rent-to-own scams in Ontario. One of the most common scams involves fraudsters who claim to be the owner of a rent-to-own property when they’re not. These people will advertise a property they don’t own in hopes of collecting fees upfront from the renter, then disappearing with the money.
To protect yourself from being scammed, make sure to familiarize yourself with the following red flags:
- The home is in foreclosure. If the property is in the process of foreclosure, then the title of the property isn’t really in the name of the owner any longer. At this point, the lender will have repossessed the property and likely taken steps to sell it. At this point, it is not available for a rent-to-own arrangement.
- The home is in worse shape than expected. If a property needs some TLC, the listing will disclose this information. But if you visit the property and see that it’s in much worse condition than advertised, this is a big red flag.
- The home is priced far above fair market value. Even if the home is legitimately owned by the person claiming to be the owner. They could scam you into locking in at an agreed-upon purchase price that is way more than what the fair market value would otherwise dictate. If you choose to buy the home once your lease ends, you’ll be paying an unfairly inflated price and risk owing more on your mortgage than the home is worth.
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 speak to a real estate lawyer who can guide you through the rent-to-own contract before you sign on the dotted line.
In addition to the terms 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. This means that the landlord is obligated to sell the property to you under the law if you choose to take advantage of this option.
Final Thoughts
If coming up with a sizable down payment is difficult and your credit is bad, you might find it tough to buy a home the traditional way. However, programs like rent-to-own can provide you with the opportunity to become a homeowner if such obstacles get in the way.
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 rent-to-own specialist before you take the next steps.
