Rent-to-own Homes in Canada | Fivewalls

Rent-to-own Homes in Canada | Fivewalls

Last Updated: Jan 27, 2021

Home ownership in top cities, such as Toronto or Ontario, is proving more difficult as these cities continue to grow. As lenders keep raising the standards for mortgage approval and housing prices continue to rise, prospective home buyers look for other options for home ownership. As the down payment is the key to becoming a homeowner, what can renters do if they cannot afford it on their own or get approval for a loan?

Rent-to-own is the solution many are turning to as it is simple and effective. Some landlords are opting to include rent-to-own to provide options for renters who do not meet the required 680 credit score and do not have sufficient funds for a down payment. While no one is denying these requirements are difficult to meet, other routes to homeownership are cropping up, such as rent-to-own, to allow prospective buyers more opportunity.

How does rent-to-own for real estate work?

If a home seller is having a difficult time selling a particular property, they might offer a rent-to-own program upon finding a reliable tenant. A smaller portion of the down payment for the home, usually 1%-5% of the property’s market value, is offered to guarantee the buyer will be able to purchase the home at the end of the renter lease. This also ensures the price of the home is locked in. 

During the rental period, the seller is allowing time for the renter or buyer to improve their credit so they can receive a mortgage before their lease is up. During this time, the home seller can choose to set aside a small portion of the monthly rent for the buyer’s benefit after the leasing period is up.

For example, if rent is typically $1,200 a month, it might increase to $1,400 for a rent-to-own lease with $200 set aside for the buyer. 

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What terms are in a rent-to-own agreement?

Essentially there are two agreements in motion simultaneously in a rent-to-own program. The first being signing the lease agreeing to be the tenant.

The second is the agreement on the price of the home that locks in the price for the future purchase by the tenant. Combined, these agreements the tenant responsible for paying rent in a timely manner, ensuring they continue to build their credit, and making sure the agreed-upon price will be within their means after the leasing period. 

What are the benefits of rent-to-own homes?

There are great benefits of rent-to-own homes in Ontario and in particular, Toronto. The real estate market is reaching heights that have never been seen before. With home prices skyrocketing, rent-to-own is providing incredible advantages for tenants.

Advantages of rent-to-own homes include:

Time: With rent-to-own, now there is time to breathe a little and set goals. Most leases last anywhere from 1-3 years depending on the situation. With that time, tenants are given the opportunity to work towards homeownership while living in the home.

Set Price: As soon as the agreement is signed, the price of the home is 100% locked in and cannot change. This works to the benefit of the buyer especially now when housing market prices are continually rising. 

Trial Run: Living in a home before committing to it is a unique experience that will aid the buyer in their decision to purchase the home at the end of the lease or not. However, all equity in the home will be lost if the buyer chooses not to purchase.

Build Credit: One of the top benefits of rent-to-own is the opportunity to build credit. The main reason most Canadians or buyers new to the area cannot purchase a home is due to low credit or no established credit history. 

Landlord: While renting if something goes amiss with the home, the landlord is responsible for repairs and replacement. Another sigh of relief for those saving for a down payment

If I have bad credit, can I still participate in a rent-to-own program?

Typically rent-to-own programs are designed to aid prospective buyers with bad credit in improving their credit score and making them eligible to purchase. This means the leasing period might depend on just how bad the credit in question is, but most programs are ready to give the time needed to increase credit scores in order to move the property.

What are the risks of rent-to-own homes?

While there are some risks with rent-to-own homes, the good typically outweighs the bad. That being said, knowing the ins and outs of the process is important.

Risks of rent-to-own homes for buyers include:

Lost Money: If the buyer chooses not to purchase the home, all money that has been put in during the lease agreement is lost.

Time-Consuming:  It can take quite a bit of time depending on low credit scores and the time needed to repair them.

Decreasing Market Value: If the home decreases in value, the price agreed upon is still in effect even if the home is worth less than it was at the time of the agreement.

Issues with the Home: If there are unseen issues with the home, the buyer is still in a lease agreement until the time is up and they will lose the money they paid if they choose not to purchase. 

Money Saved When Choosing Rent-to-own

Though there are pitfalls to every scenario, the money saved when choosing rent-to-own in Toronto, Ontario, or any other flourishing city makes it a favorable choice. 

If a property is worth $500,000 at the time of the agreement and projected to increase to $560,000 by the time of purchase, the buyer is saving $60,000 in equity which is astronomical, especially for a new buyer or a buyer with a low credit score.

While rising prices and strict lending agreements might make buying a home seem impossible, know that there are other options out there. Renting-to-own could just be the solution that changes the game for many prospective home buyers in the coming years. 

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