Not everyone can afford the upfront costs of a mortgage, downpayment and lawyer fees. That’s why rent-to-own agreements exist. Through this program, those who are unable to afford a down payment on a mortgage can purchase a home. This might sound too good to be true, but believe us when we say it’s not.
That’s why BrokerLink has prepared a guide to help you understand the rent-to-own program in Ontario, Canada. Before enrolling in this program, you will need to meet a few key requirements, including being able to afford a certain purchase price and monthly payment. Let’s learn more about how this program can change your life.
About the rent-to-own program
What does the term “rent-to-own” mean? In simple terms, it means part of a monthly rent payment is set aside to contribute to buying the home later on. The date of purchase is usually set to be one to three years in the future. Before signing any papers, you should review our tenant insurance guide.
How does it work? As the tenant sets aside money from their monthly rent payments, they build home equity, lowering the required down payment on the home. However, it’s important to note that an upfront, non-refundable option fee is required to obtain this privilege. This option also comes with the risk of losing the built-up equity if the home is not bought by the date stated in the contract.
Why would a landlord choose this option? There are just as many benefits for them as there are for tenants. Firstly, landlords can receive more money from long-term tenants who will maintain the property more as they will own it in the future. Additionally, those selling risk less as they get the initial deposit and rent no matter what. New buyers and tenants can also be found if needed.
Without the burden of an upfront down payment, a rent-to-own agreement is a win-win for everyone. A rent-to-own home lets tenants buy a home for a lower purchase price while allowing landlords to collect rent longer. Sometimes, tenants don’t qualify for a mortgage immediately, so building equity can assist with this. That said, we should discuss the types of available rent-to-own agreements.
Types of rent-to-own agreements in Ontario, Canada
Rent-to-own homes in Ontario come in two forms: lease-option agreements (flexible purchase) and lease-purchase agreements (binding purchase). These types of rent-to-own homes are distinct from one another, and each has its own conditions and stipulations. Let’s find out more:
Lease-option agreements (flexible purchase)
If you’re buying a rent-to-own home, your best bet is asking for a lease-option agreement. This rent-to-own agreement allows you to walk away from the purchase. It’s a helpful option if you are unhappy with the home’s condition or cannot get a mortgage you can afford. Opting for this rent-to-own contract will allow you to walk away without losing the money you’ve invested into your home.
Lease-purchase agreements (binding purchase)
On the other hand, if you are selling a home, a lease-purchase agreement makes more sense. This rent-to-own arrangement means the seller has to buy the home at the end of the rental period. If the tenant does not comply, they can face financial penalties and legal issues.
Rent-to-own options can benefit renters and sellers alike. Renters can save money to purchase the home, while sellers can collect money and get a commitment to a longer rental agreement. No matter your situation, there’s often a way to make rent-to-own work. Next, we will discuss who should consider a rent-to-own home.
People who can benefit from a rent-to-own agreement
Purchasing a home and saving up for a down payment takes a lot of time and money. Not everyone can qualify for a mortgage, and rent-to-own agreements can act as a great alternative. This non-conventional purchase option allows those who wouldn’t always be able to purchase a home to do so. With that said, certain groups of people can benefit more from rent-to-own homes than others. Let’s get into it:
Lack of down payment
You need to have a down payment on hand to purchase a home. However, not everyone can put away money every month, which makes using a portion of monthly rent payments an appealing option. This money will be applied to the purchase of the home directly and bring down the required down payment.
Low credit score
To qualify for a mortgage, you need a decent credit score. Rent-to-own homes loosely waive this requirement. That’s because, during the lease period, tenants can work on improving their credit scores. A better credit score increases the likelihood of getting approved for a more affordable mortgage rate.
Not a high enough income
Unfortunately, if someone doesn’t have a high enough income, they cannot qualify for a mortgage. However, a rent-to-own agreement provides some flexibility. It provides the gift of time because renters can work on increasing their income while renting. A higher income leads to lower down payment and mortgage rates.
Non-traditional income
The reality is that those with a non-traditional income sometimes have trouble purchasing homes. For example, self-employed people usually require a high down payment (20%- 40%) to qualify for a mortgage. That’s why a rent-own agreement is often an appealing option.
Many people opt for rent-to-own agreements for a variety of reasons. However, the common goal is buying a home at the agreed purchase price at the end of the rental term. This makes it easy for almost anyone to purchase a home, even if they wouldn’t be able to do so under traditional circumstances. Now that we know who should choose rent-to-own programs, let’s talk about their advantages.
Advantages of rent-to-own programs
A rent-to-own agreement is a great thing for a plethora of reasons. It’s often a better option than purchasing a home the traditional way. Here are some reasons to choose a rent-to-own arrangement to purchase the home of your dreams. Advantages of rent-to-own include:
Live in your home without an upfront down payment
The best part about rent-to-own agreements is how they let you live in the home you are going to purchase while saving for a down payment. Usually, you have to put a down payment on a home before moving in, but this option allows you to rent while saving money for one. A portion of the rent credit goes towards the purchase price of the home.
Improve your credit score
In order to qualify for a mortgage, you need to have a good credit score. In contrast, renting can be more lenient with this requirement. A rent-to-own arrangement allows you to build equity and credit to get a better mortgage rate. This can also alter your home insurance tax deductibles.
Try out home ownership
If you get a lease-option agreement, you can see if homeownership is something you want. Owning a home is a lot of responsibility because you are responsible for the maintenance requirements. Additionally, you can change your mind if you are using this type of agreement. Once you own the home, you can bundle your home auto insurance policies.
Learn about your future neighbourhood
When you buy a home the traditional way, all you can go off of is word of mouth when moving into a new neighbourhood. In contrast, a rent-to-own agreement will allow you to live in your future home while saving money towards a down payment. Living somewhere for a few years can tell you a lot about a place.
A guaranteed purchase price
The housing market is a revolving door that’s constantly changing. Prices can fluctuate, and the higher they are, the higher the down payment. Rent-to-own agreements can prevent the purchase price from skyrocketing due to bidding wars. This is particularly helpful in big cities like Toronto, where homes are very expensive. With these high prices, you should consider changing your house insurance because expensive properties lead to an insurance premium increase.
A rent-to-own home allows you to purchase the home on your own terms. The purchase price will not change while you are learning about the neighbourhood and finding out if homeownership is something you want. However, rent-to-own homes have some downsides, which we will discuss shortly.
Cons of rent-to-own agreements
Rent-to-own agreements are a great option, but they aren’t perfect by any means. There are certain risks you take when you choose a rent-to-own agreement. Now, let's explore the drawbacks of a rent-to-own agreement:
Higher rent payments
Although it isn’t always the case, rent-to-own properties often have higher rent prices than their counterparts. The above-market rates are there because a portion of the rent is put towards a down payment on the home. Review your agreement before signing a contract.
Getting a mortgage at the end of the lease
If you choose a lease-purchase agreement, you have to secure a mortgage by the end of the rental term. Most of the time, this is a good thing because it was your goal all along. However, if you have not saved up enough money for a down payment or have too low of credit, you might not qualify.
Losing your money
You should always review the terms and conditions of your agreement. Sometimes, a rent-to-own program can be a double-edged sword in the sense that you can lose money if you do not meet its requirements. For example, if you choose not to purchase the home or cannot afford a future down payment, you will lose the equity you built in the home.
Taking care of the home
Unlike a traditional rental agreement, your landlord is not responsible for repairing and maintaining the property. However, this statement has its limitations. If the previous mortgage has not been paid off yet, your landlord will have to pay for these things, and your agreement will be on hold until it is.
Purchase price set in stone
The future purchase price was also mentioned as an advantage. However, being locked into paying a certain price also has its downsides. If the housing market takes a turn and prices decrease, you will be stuck paying the agreed purchase price at the end of your rental term, no matter what.
Monthly payments and rent credits can make owning a home more affordable. Despite this, you should remember that the rent-to-own option has flaws, including scams. Let us enlighten you to prevent you from falling for one.
Avoiding rent-to-own scams
Everywhere, people want to take advantage of others. That’s why it’s essential to be aware of rent-to-own scams. Here are the most common red flags you should look out for:
Home in foreclosure
When a property is in foreclosure, the title is no longer in the name of the previous owner. This means it has been repossessed by a lender who is taking steps to sell it. This means it is not eligible for a rent-to-own-agreement.
Home in rough shape
If you arrive at the property with damage not mentioned in the listing, run! This is especially true if the home is in much worse condition than described. Avoid a rent-to-own agreement because you might end up responsible for certain repairs.
Home more expensive than market value
In the event that someone who owns the property is pricing the home significantly above its market value, avoid rent-to-own agreements. That’s because you will be locked into paying this price at the end of the rental term.
Rent-to-own agreements allow you to get your foot into the real estate market. However, understanding how rent-to-own works will help you avoid scams. Always review the terms of an agreement before signing anything.
Get your home insurance from BrokerLink!
Once you own a home, you’re going to need home insurance. It will protect your home if it gets damaged. That way, you won't have to pay for the damages out of pocket. At BrokerLink, we offer various types of home insurance, including:
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