Rent-to-own is a type of housing agreement between the renter and the landlord where, during the rental period, the tenant’s rent also contributes towards their eventual down payment on the property. Once the agreement has been fulfilled, the tenant has the option to purchase the property outright. Rent-to-own agreements can be a great option for those looking to own a home but need some time to save up money or improve their credit. It’s important to note that these agreements can vary significantly, so it’s essential to read them in detail and understand what rights and responsibilities you have.

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Key Takeaways

• Rent-to-own agreements enable you to rent a home with the added option of purchasing the property in the future so you can save a down payment in the meantime
• If you’re turned down for a mortgage because of such things as credit blemishes, excessive debt and/or insufficient income, you have time to address these issues while you rent-to-own
• There are two types of rent-to-own agreements and it’s important to understand which one is best for you

What is rent-to-own?

Rent-to-own agreements enable you to rent a home with the added option of purchasing the property. The money that will eventually go towards your down payment on the home is referred to as rent credits. You either enter into an agreement directly with your landlord or through a rent-to-own company.

Tip: There are several companies that specialize in rent-to-own options across Canada. Be sure to do your research before deciding which one will benefit you the most

How does rent-to-own work?

If you choose a rent-to-own agreement for a property, you must sign both a rental agreement and a rent-to-own agreement. As you pay your monthly rent, a portion is set aside (called rent credits) for your eventual down payment on that home. 

While you’re not always obligated to purchase the home (depending on your lease agreement), if you decide not to follow through with the purchase, you’ll lose the rent credits that have built up while you’ve been paying rent on the property. You can purchase the property either during your lease or once your lease expires. The duration of the rent-to-own agreement can be set anywhere from one year to five years. 

Reasons to rent-to-own

There are several benefits for opting to rent-to-own a property. The biggest perk is that you can save for the down payment through your regular rent payments. This option also often lets you lock in a purchase price, which means you don’t have to worry about prices skyrocketing. You also get to live in the home while you save up the money to purchase the property, so there are no added moving costs. Additionally, if you’re turned down for a mortgage because of such things as credit blemishes, excessive debt and/or insufficient income, you have time to address these issues while you rent-to-own.

Down payments for rent-to-own

While a rent-to-own agreement will help you save additional money for a down payment, most rent-to-own companies in Canada require an initial down payment before you begin renting the home. This is typically less than the minimum down payment required for an insured mortgage, but it can still cost thousands of dollars. This initial down payment fee is used by the renter to purchase the option that gives them the ability to buy the home in the future.

Finding rent-to-own properties

You can either find a suitable property through a rent-to-own company or approach a homeowner looking to sell who may be willing to rent-to-own. 

Some rent-to-own companies allow you to choose a home that’s on the market you’d like to rent-to-own, while others limit you to a certain home price and down payment in order to ensure you can afford to purchase the property in the future. If you use a local rent-to-own company, you’ll be able to purchase a home anywhere that the company allows. 

Ways to purchase a rent-to-own home

A rent-to-own agreement can be set up in the following two ways:

1. Lease-Option Agreement: Also known as an option to purchase agreement, you’re given the choice to purchase the home in the future, but you’re not required to follow through. This means that you can decide not to buy the home at the end of your lease without facing any penalties or other consequences aside from losing your rent credits.

2. Lease-Purchase Agreement. When entering into this type of contract, you’re agreeing to purchase the home at the end of your lease. If you fail to purchase the home – because you’ve changed your mind or you can’t qualify for a mortgage – you may have to pay penalties.

Regardless of which contract you select, if you choose to purchase the property, you’ll have to qualify for a mortgage. This means that your credit should be in good standing, your employment consistent and your debt levels manageable. 

Rent-to-own: Documents, fees and contract details

Option fee

As part of your option to purchase agreement, you’re required to pay an upfront fee – known as an option fee – that allows you to have the option to purchase the home in the future. This fee is nonrefundable, which means you will lose it if you decide not to purchase the home. 

You can typically negotiate the option fee, which often ranges between 1% and 5% of the purchase price of the home. If you decide to use your option to purchase the property, the option fee becomes a non-refundable deposit made towards the home.

Be aware that having a lower option fee, or initial down payment, will result in higher monthly payments. This is needed in order to make up a minimum down payment by the end of your rental term. Paying a larger down payment upfront will provide you with the flexibility to have lower monthly payments, as less money will be required to go towards your down payment savings.

Important: If you fall behind on your rent payments or break a term of your lease, you may lose your option fee

Length of contract

Your rent-to-own agreement will include a specific contract length – ranging from one to five years. Many companies set the contract at three years, giving you just the right amount of time to come up with the required down payment to qualify for a mortgage. That said, the contract time can often be longer or shorter depending on your specific financial situation.

Purchase price

A purchase price for the home can either be negotiated in advance based on the current property value or set on the future price of the property.

It pretty much goes without saying, however, that if you have a longer option period of five years, for instance, the purchase price will likely be based on the value at the time the option is exercised, rather than set when the contract is signed, as home values can rise significantly over a longer period of time.

Rent credits

An agreed upon percentage of your monthly rent payments – usually ranging from 15% to 25% – is set aside as rent credits. These are then put towards your down payment when you decide to purchase the home.

Maintenance responsibilities

As a renter, you typically aren’t responsible for repairs and maintenance on the property. It’s important to note, however, that some rental companies treat you more like an owner than a renter when you have a rent-to-own agreement in place. Be sure to ask about your specific maintenance responsibilities.

Rent-to-own agreements

There are two types of rent-to-own agreements. See: Ways to purchase a rent-to-own home above for more details.

Rent-to-own Examples

Monthly Rent	Percentage of Accrual	Down Payment Outcome Over 3 yrs
$1,500	20%	$10,800
$2,000	20%	$14,400
$2,500	20%	$18,000
$3,000	20%	$21,600

By way of example, if you pay $1500 in rent every month for three years, and 20% of that accrues as rent credits, you would have $10,800 to put down as a payment towards the purchase of the home. In rent-to-own, your rent is often slightly higher than the going rate in the area, as it factors in payment towards the rent credit you will receive.

Frequently Asked Questions

Conclusion

With this unique form of housing agreement, renters are given an opportunity to slowly accumulate the funds necessary for their down payment and ultimately own property. In the long run, this type of agreement could save renters a lot of money that would otherwise be spent in rent alone fees. If you are a renter who is dreaming of homeownership, but aren’t sure how to achieve your goal, our mortgage experts can help you get started!

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