Jan 11, 2023
Is rent-to-own worth it?
Many are choosing to purchase smaller homes, borrow money for a down payment, or even move to places where housing is more affordable. Can rent-to-own help alleviate the housing crisis?
As of November 2022, the average home in Toronto sold for $997,000 according to Zolo. It’s become challenging for Canadians to buy their home, but there are options. That same year, the Trudeau government decided to invest $2 billion in funding for the rent-to-home housing program.
Here is a look at how rent-to-own works in Ontario and if you need specific home insurance.
What is rent-to-own?
Rent-to-own allows people to rent a home, with the option to buy it. These programs can be very supportive for those who want to buy a home but haven’t saved up for a down payment.
The Liberal government website states, “Under a typical rent-to-own model, an individual commits to renting a property for a period of time with the option of buying it at a locked-in price before the end of the lease, to allow them to save for a down payment.”
It is an agreement between the landlord and the tenant. Eventually, the down payment will increase and the home can be bought from the landlord. There needs to be a clear option at the end of the lease to buy and a set timeline.
How does rent-to-own work in Ontario?
A portion of monthly rent payments, also known as rent credits, will go towards a down payment of the home. The agreement can also lock in a home purchase price to help you budget accordingly.
Similar to a basic rental agreement, you will pay monthly payments at a set price for a set time. The only difference with rent-to-own is the portion of money being set aside to eventually buy the rental.
There are two options available :
- Lease-option agreement : Also known as an option to purchase agreement, you can choose not to buy the home at the end of your lease without any additional fees or penalties.
- Lease-purchase agreement : You fully agree and commit to purchasing the home at the end of your lease. If you change your mind or can’t qualify for a mortgage, you will likely experience penalties.
The agreement will also cover how long the lease term is, the rental price, costs being set aside from the down payment, possession date, home purchase price, and contract expiry date. Like all important contracts, make sure a lawyer reviews all documents to help you understand the agreement and expectations clearly.
Here’s an example of how things might look financially for rent-to-own :
- Agreed Purchase Price : $390,000
- Option to Purchase Deposit : $390,000 x 2.5% = $9,750 (due at tenant move-in date)
- Amount Owing After 3 Years : $390,000 – $9,750 = $380,250
- 5% Down Payment Required : $380,250 x 5% = $19,012.50
- Monthly Rent : $1,500
- Extra Funds for Future Down Payment : $600/month
- Down Payment Saved After 3 Years : $600 x 36 months = $21,600
Amount Leftover After Putting Down 5%: $21,600 – $19,012.50 = $2,587.50
In this example, the tenant will save $21,600 for the down payment over three years, while they are renting the property. After putting 5% down ($19,012.50), they could save to remaining money or put it towards closing costs. These numbers are only used to illustrate how a potential rent-to-own scenario could work.
Pros of rent-to-own
Rent-to-own is designed to make buying a home easier for Canadians to enter the real estate market. If you are considering rent-to-own a home, here are some of the reasons why it can be beneficial :
- Build your savings : Renters can build up their savings account directly and through rent credits that can applied to the home purchase. They will have time to address financial issues and meet savings goals.
- Credit score increase : Making on-time rent payments will help increase the renter’s credit score, which can positively impact a mortgage.
- Living in a home before buying : While you rent-to-own, you take more pride in where you are living since it will one day be yours. Before committing, you’ll also have time to explore the community and living situation.
Cons of rent-to-own
Like any home buying process, there are some cons. Here are some of the potential risks of rent-to-own a home.
- Restrictions : There may be some restrictions on the property during the leasing time, such as updates or property features.
- Property value : If the property value decreases during the lease period, you will likely still need to pay the original price. Be sure there is a clear understanding in the agreement. Keep appreciation in mind. The economic climate could make rent-to-own riskier than renting or buying a home.
- Missed payments : If you miss a payment, it may negatively affect the agreement, such as a loss in the down payment.
Do I need insurance for rent-to-own?
When you are renting in Ontario, you are responsible for the building and your belongings, that’s why tenant insurance is a requirement for the renter, and landlord insurance is necessary for the owner. Even while you are rent-to-own, you will need proper coverage to meet the owner’s requirements and your needs.
If you have been approved for rent-to-own, you will qualify for renters insurance instead of homeowners. Once you own the property, and the property title is transferred into your home, you will need home insurance, since you own the house.
Rent-to-own Ontario FAQs
Any major city in Ontario is a great place to see if rent-to-own suits your needs and budget. Not only is Toronto home insurance higher, so are the home prices. The program can help overcome the high down payments.
Leasing to own can be a great idea for new homeowners if you are looking for support on a down payment and commit to the financial rules of the agreement.
There are companies who help Canadians find rent-to-own homes or search online for “rent-to-own homes near me” to find a catalogue of listings.
Is rent-to-own for you?
If you are having a hard time saving for a down payment, rent-to-own may be a good option to support you on your home buying journey. Ensure you understand the agreement, legal stipulations, and requirements. Be prepared to commit to the journey and make sure your Ontario home insurance is up to date.
