If you’ve been keeping track of housing prices in Canada’s major cities, you know that they have been sharply rising over the past decade or so. While Vancouver is well known for its exorbitant housing prices, Toronto and Montreal are not far behind.
This situation has put home ownership out of reach for many Canadians – even those with decent, stable incomes. When prices are so high, down payment amounts increase. Saving for that down payment is now tougher than ever, forcing many hopeful homeowners to opt for renting instead.
Getting approved for a mortgage is also getting more and more difficult. Financial institutions have been tightening their standards, making it a challenge for the average Canadian to qualify for a mortgage.
Despite low interest rates, saving for a large down payment and getting approved for a mortgage are serious obstacles to home ownership in the current market.
Faced with these obstacles, what should you do if you’re looking to become a homeowner in Ontario? Fortunately, you have options when it comes to owning your own home. One of the more popular ones is a rent-to-own program. This is an alternative path to purchasing a home is a great way to get around the common roadblocks to home ownership.
What is rent-to-own?
Rent-to-own is an arrangement that is similar to renting. You pay the monthly rent amount to a landlord (the owner of the property) as you would if you were a regular tenant. The main difference is that in a rent-to-own arrangement, part of your monthly rent payment is put toward your down payment for the purchase of the property you are living in, as long as you eventually end up buying it.
This is better than renting and saving up for a down payment on your own, because in a rent-to-own situation, the savings comes from a portion of your rent (rather than being an extra cost on top of it). Plus, you get to live in the property before you purchase it.
Rent-to-own programs in Ontario are a great way for Canadians to overcome the common obstacles to home ownership. They provide an easier way to accumulate funds for a down payment and aren’t as hindered by poor credit ratings, as conventional mortgages would be.
How does rent-to-own work in Ontario?
According to rent-to-own Ontario laws, two agreements between you (the buyer) and the landlord (the owner) must be signed:
- The “lease agreement.”
- The rent-to-own “option to purchase” agreement.
You’ll need to sign both of these rent-to-own agreements before you get access to the property, much like any other lease agreements or purchase agreements.
The lease agreement involves a specific term, determining how long you will be leasing the property from the owner. In general, these terms last anywhere from three to five years.
Important note: the duration of the lease term should give you enough time to accumulate a down payment and improve your credit rating if necessary. This will make it easier for you to get approved for a mortgage down the line.
The option to purchase agreement basically means you have the right to buy the property at the end of a certain period of time. The owner will be obligated to sell the property to you under the law if you choose to take advantage of this option.
Important note: a rent-to-own option to purchase agreement is just that – an option. You can decide whether or not you want to buy the property after the term is up. This is different from a lease-to-own or lease purchase agreement, where you agree in advance that you will buy the property after the lease term has elapsed.
What are some types of rent-to-own properties?
Rent-to-own homes in Ontario come in a variety of types. Generally speaking, you can find every type of property for a rent-to-own arrangement that you would on the regular housing market. This includes single-family homes, semi-detached homes, and townhouses.
What else is in a rent-to-own agreement in Ontario?
In addition to the lease and option to purchase agreements mentioned earlier, other features of a typical rent-to-own agreement in Ontario include:
- The rent amount, due dates and payment method
- What is included in the rent, if anything (utilities, etc.)
- What percentage of the rent goes toward the down payment
- The amount of down payment required
- The property’s final purchase price
- The window of opportunity to purchase
- The date you legally take possession of the property
- The contract expiry date
What are the potential pitfalls of rent-to-own?
While there are many obvious advantages to rent-to-own, there are also a few pitfalls that you should be aware of, such as:
If you don’t end up buying the property at the end of the lease period, you’ll lose all the money that you accumulated towards the down payment (and the equity you would have in the property).
While you’re living there on a rent-to-own basis, you won’t have as much control over the property as if you were the owner. That means you won’t be able to make any substantial changes to the property.
If the property’s value goes down by the time you exercise your right to purchase, you may not be able to renegotiate a lower price.
If you don’t pay the rent on time, you could lose your right to purchase the property.
Finally, you could fall victim to a rent-to-own scam. This is why doing your due diligence is crucial. Make sure that you find out as much as you can about the program and get trusted advice from an independent legal advisor before signing any rent-to-own contracts.