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Owning a property in Canada is a huge milestone for many immigrants and newcomers, as it serves as a clear indication that they have made a home here. Likewise, many Canadians are finding it increasingly difficult to purchase a home as rising interest rates have significantly increased the income requirements and costs associated with a mortgage.
In many major Canadian cities, housing affordability is a well-known problem, and innovative home ownership options like rent-to-own, also known as lease-to-own, are becoming more and more common. The rent-to-own model has the potential to help you achieve your goal of becoming a homeowner in Canada faster by removing the requirement for a sizable down payment and providing you more time to improve your credit score.
In this article, we'll educate you about the opportunities of rent-to-own homes in Canada and explore how this model can make buying a home in Canada more accessible.
How Does Rent-to-Own Work in Canada?
Rent-to-own is a unique agreement that enables people to rent a property with the option of buying it at a later date. For those who are able to buy a property but encounter difficulties getting a standard mortgage approved, this arrangement may be a viable alternative. Understanding rent to own vs mortgage options can help you decide the best path to homeownership.
The lease-to-own approach aims to close the gap for prospective homebuyers who encounter challenges related to a lack of Canadian credit history, bad credit, low income, or a limited down payment. Here's a detailed breakdown of how it works to rent-to-own:
1. Rental Terms & Tenant Responsibilities
You will sign a rental contract with the property owner (usually a landlord or property company) during the initial renting period. Here are some of the key differences to take into account when it comes to renting vs rent-to-own:
Initial Deposit (Option Fee)
In some situations, it could be necessary to make an upfront initial deposit, also known as an option fee. This gives you the exclusive right to buy the property within a given time frame and at a predetermined price. It's critical to specify in the lease-to-own agreement if this fee is refundable or not and under what conditions.
Monthly Rent
During this time, your rent payment is split into two parts. Your regular rent, which represents the majority of your monthly payment, while the smaller portion is allotted as rent credit, which goes towards building up your savings for a down payment. Simply put, a portion of your monthly payments is set aside as a down payment on the house you will eventually buy.
Lease Term
The renting phase usually lasts for a set amount of time, which might vary but often falls between one and five years. This gives you the chance to settle in, get to know the property and neighbourhood better, and take steps to achieve your dream of becoming a homeowner during this time.
Maintenance and Repairs
A common question we hear is, “Who is responsible for repairs and maintenance during rent-to-own?”. During this period, you, the renter, are typically responsible for the property's maintenance and repairs. This includes things like maintaining your lawn and making minor repairs.
2. Key Rent-to-Own Terms
Here are some key rent-to-own terms and agreements to be mindful of:
Types of Rent-to-Own Contracts
There are two common types of lease-to-own contracts in Canada, lease-option agreements and lease-purchase agreements. It’s important to understand the differences and legal implications of each before signing any rent-to-own contract.
Lease-Option Agreement
In a lease-option agreement, you are given the choice but not the obligation to buy the property in the future. This essentially means that you won't face any further consequences if you decide to break your lease early.
Lease-Purchase Agreement
Contrarily, a lease-purchase arrangement calls for you to make the commitment to buy the house when your lease is up. Failure to finish the transaction, such as if you are denied a mortgage or your circumstances change, typically will result in the full loss of all accumulated savings
Rent Credits
Whether you sign a lease-option or lease-purchase agreement, a percentage of your monthly rent payments is set away as "rent credits." These credits add up over time and are deducted from the house's principle. It is crucial to be aware that you can lose the rent credits you've already paid if you decide not to move forward with the purchase.
Purchase Price
Your contract will include the home's purchase price, which is ordinarily determined at the start of the rent-to-own phase. This set purchase price offers stability in a home market where values are constantly changing.
Requirements for Rent-to-Own Homes
You might be wondering how to qualify for rent-to-own. While rent-to-own offerings typically have more flexible income and credit requirements than your typical mortgage application, there are still minimum requirements that need to be in place to eligible to participate in these programs:
1. Stable Income
Your monthly income needs to be able to cover both your monthly rental payments and living expenses each month, ensuring you are as close to cash flow positive each month.
2. Upfront Initial Deposit (Option Fee)
You must pay an initial deposit, which can be anywhere from a few thousand dollars to a number of percentage points of the property's purchase price, as was previously noted.
3. Commitment to Credit Score Improvement
All applicants are required to meet the minimum credit score criteria as total outstanding debt and recent loan delinquencies will be assessed. Rent-to-own offers you a chance to improve your finances and credit standing. Throughout the lease period, it's essential to actively work towards improving your financial standing.
Types of Homes that Qualify for Rent-to-Own
Although many people find rent-to-own to be a good option, not all types of properties may be eligible for this arrangement. Condominiums, townhomes, and single-family homes are typically the sorts of properties that are offered for rent with the option to purchase. It’s important to know upfront what kinds of properties are eligible for a rent-to-own program you’re looking to participate in.
Rent-to-own homes are available in a range of settings, including urban, suburban, and rural communities. The agreement between you and the property owner or investor determines whether a property is suitable for rent-to-own in significant part.
How Monthly Payments are Calculated
In a rent-to-own contract, the monthly payments often include both the regular rent and a sum that goes toward accumulating rent credit towards your down payment. Here is an explanation of how these payments work.
Standard Rent
This is comparable to what you would pay in a conventional rental agreement, and is covered in large part by your monthly payment. This sum entitles you to occupy the premises throughout the term of the lease.
Rent Credits
You receive a smaller portion of your monthly payment as rent credits. These credits build up over time and are reserved for use as principal on the house. They signify your financial commitment to the home and support your claim to ownership in the future.
Depending on the parameters of your rent-to-own arrangement, a different formula may be used to divide rent and rent credits. It's critical to comprehend the precise form of these payments within your specific agreement.
Advantages & Disadvantages of Rent-to-Own in Canada
Rent-to-own provides a unique route to homeownership, but you must balance the benefits and drawbacks to decide if it's the best option for you. Here is a fair analysis of the pros and cons of renting to own.
Advantages of Rent-to-Own
Easy Access to Homeownership
Renting to own can be a great choice if you're not quite ready to buy a home but still want to go on the property ladder. Obtaining a mortgage approval can be difficult, particularly if you have poor credit or insufficient funds for a down payment. Renting to own enables you to accumulate equity in the property while you live in the home and get ready to buy it.
Option to Try Before You Buy
You can test out a house before you decide to buy it by renting to own it. Before making a purchase, you can make sure the house lives up to your expectations and is a good fit for you and your family.
Fixed Price and Terms
The opportunity to lock in the price of the home and the rental terms is one of the biggest advantages of renting to own. As a result, the price of the house and your monthly payments are predictable.
Credit Improvement
Your credit score can rise if you rent-to-own. When the rental agreement is over, it will be simpler to get a mortgage the higher the credit score you have. Making consistent monthly rent and debt payments will be critical to improving your credit score.
Disadvantages of Rent-to-Own
Locked-in future buy-back price
While locking in a purchase price might be a good thing if prices are higher at the end of your lease term, you may have committed to paying more than what the home may be worth when it's time to buy.
Non-guaranteed mortgage approval
At the end of the lease term, you're required to get a mortgage to help finance the purchase of the home. If you don't work to improve your financial and credit profile during the rent-to-own lease period, you may not qualify for a mortgage needed to purchase the home.
Higher monthly payment
The monthly payment consists of rental fees and savings, it is typically higher than the usual mortgage.
Rent-to-Own Programs in Canada
We've covered how rent-to-own works, looked at the kinds of homes that are eligible, and provided the advantages and disadvantages of leasing to own a home. The next consideration is what rent-to-own programs are available in Canada.
Requity Homes Rent-to-Own Program
The Requity Homes rent-to-own program offers a comprehensive program designed to help aspiring homeowners overcome financial barriers. Their process is straightforward and supportive, ensuring you have a clear path to homeownership.
How Does Requity Homes Rent-to-Own Program Work?
1. Apply to Qualify
Find out your eligibility and home budget with Requity Homes. It's free and will not impact your credit score. Sign-up and get pre-qualified for rent-to-own.
Tip: Use our free rent-to-own calculators to calculate your rent-to-own affordability and what your rent-to-own payments might look like.
2. Find Your Dream Home
You have the freedom to choose the home you'd like us to purchase for you. We'll handle the purchase process. View rent-to-own listings in Canada.
Rent-to-Own Homes in Alberta
Rent-to-Own Homes in Alberta
Rent-to-Own Homes in Saskatchewan
3. Move-In and Save Up
Rent your dream home and start saving more of your down payment every month. With Requity Homes, you're on the path to building your future.
4. Buy Your Home or Walk Away
When you're mortgage-ready, you have the option to buy back the home from Requity Homes. Alternatively, if your plans change, you can walk away and cash out your savings.
Requity Homes offers a simplified path to homeownership with fair & transparent guidance, a wide range of qualified properties, and flexible buyback terms tailored to your goals and finances. We're committed to supporting you every step of the way.
How to Apply for a Rent-to-Own Home
Ready to take the next step toward homeownership? Applying for a rent-to-own home with Requity Homes is easy and hassle-free. Get pre-qualified today to find out what your home budget looks like and view rent-to-own listings.
Pre-Qualify for Rent-to-Own in Canada
