Fast forward to today, home prices have gone through the roof in cities across Canada, making it significantly harder to buy a home for many Canadians. No matter how hard you save, rising home prices end up leaving you feeling further behind than when you started. Rent-to-own combines both the financial upside of home ownership with the flexibility of renting and is a great intermediate step between renting and owning.
Rent-to-own (also known as “lease-to-own”) generally refers to the arrangement where you agree to rent a home/property for a specific period of time and you have the option to eventually purchase the home at a later date.
There are usually two separate legal agreements involved:
While not an exhaustive list, rent-to-own offers an alternative path to home ownership for people who can't typically get mortgages from a bank and include individuals:
There are different ways to structure rent-to-own. Here is a list of key terms that you should be aware of.
It’s usually pre-determined and agreed by you and the homeowner/investor at the start of rent-to-own agreement. Generally, it’s determined based on a fixed percentage of appreciation. For example, if the home value today is $100,000 and both parties agreed to a 5% appreciation per year, your future buy back price in a year will be $105,000.
You get to know precisely how much you need to pay for the home down the line. However, this could be a double-edge sword depending on how the direction the housing market goes in the future. If the housing prices increase more than the appreciation rate built in your buy-back price (i.e. 5% in this example), you’ll have the opportunity to buy back the home at a below-market value. On the flip side, if the housing market doesn’t appreciate as much, you’re locked-in a future buy back price that gives you no benefit.
Generally there are two components with your monthly payment: your rent and extra savings you put aside consistently every month that will help you build your down payment to buy the home down the line. Essentially you are forced to save by paying a premium to the market rent every month, which can be used as your down payment to purchase the home.
Generally the same length as the lease agreement, the option period varies from 2 years to 5 years depending on how long you will need to either save up enough down payment or fix credit issues before you can get a mortgage to buy back the home. Keep in mind, the longer the contract terms, the higher your buy-back price will be.
Usually you're required to put a deposit upfront that could range from 2% up to 10% of the home price. If you do decide to buy back the home down the line, these deposits will be used as your down payment. Keep in mind, depending on how the agreement is structure, these option fees and the extra savings you put aside are traditionally not refundable if you decided to not buy back or simply cannot buy back the home for whatever reason down the line.
Rent-to-own is a great alternative path to home ownership if the traditional way of purchasing a home is out of reach for you. That said, it’s important that you fully understand the rent-to-own agreements and make sure the terms of the agreements are structured in a fair way.
Requity Homes offers a new path to home ownership by helping you live in your dream home today while saving up your down payment one month at a time. Check out how we can help accelerate your journey to home ownership.
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