GottaRent Blog

Renting to Own: A Path to Home Ownership

Apr 4, 2019

While it's still a niche option in Canada, renting to own is a financing option for those who struggle to secure a mortgage. Through rent-to-own programs, renters can transition into homeowners during the agreed-upon leasing period.

Many renters pay what is easily equal to or above a monthly mortgage payment but are often denied financing due to a lack of down payment or failure to pass the federal mortgage stress test, which still requires you to qualify at the higher of 5.25 per cent or your contract rate plus two percentage points. Renting to own is a path to home ownership that rewards hardworking Canadians who can't otherwise purchase property.

If you have bad credit or lack significant savings, renting to own can make a lot of sense. Sometimes called a lease-option agreement, you pay rent for the house for the duration of the lease (one to three years, usually), with an upfront fee and additional payments that will go towards the eventual down payment.

How a rent-to-own contract works

In Ontario a rent-to-own deal is usually two documents: a standard residential lease, which is covered by the Residential Tenancies Act like any other tenancy, and a separate option-to-purchase agreement. The option agreement sets the purchase price (or how it will be set), the deadline to buy, the upfront option fee, which is commonly quoted at 2 to 5 per cent of the agreed price, and the monthly rent credit, a premium paid on top of market rent that is credited toward your down payment. Have a real estate lawyer review both documents before you sign, and register the option on title where possible so it survives a sale or a lender's claim.

House value

Some lease-option agreements state that you will pay what the home is worth at present. Others will do a projection and base the fees on the home's future value when the lease is up.

The fees are often non-refundable if you change your mind and don't go through with the sale. So, while this is an alternative path to ownership, it is still a big commitment. Read the fine print to see whether you'd be eligible for at least a partial refund if you did back out in the end.

Repairing credit rating and savings

During the leasing period, you should be saving and doing your best to pay down your debt to repair your credit rating. So, this type of agreement works only for people who can afford to pay a higher monthly rent (with a portion going towards the down payment or being subtracted from the total price of the home) while paying down debt in order to repair their credit.

Do your research before signing anything!

If you want to find a house for rent by owner, check out Gottarent.com. Look for rentals with lease options to see if there are rent-to-own options in your area.

Red flags to watch for

The seller cannot prove they own the home, or the mortgage on it is in arrears. If the lender forecloses, your option and your fees can disappear with it.
Pressure to pay a large option fee quickly, or before you have seen a lawyer.
A purchase price set far above today's market value, or vague wording about how rent credits are applied.
No clear terms on what happens to your fees if you cannot get a mortgage by the deadline.
A company that charges for a program or a credit-repair service without a specific home attached to it.

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