Rent To Own

Renting has a place and time in most of our lives, and for some people, renting is the best option long term! But for others, homeownership is a dream and exploring a rent-to-own option seems like a win-win.

What is rent-to-own?

Rent-to-own is an arrangement between a homeowner and a renter in which a portion of their rent will go towards rent, and commonly, a portion towards the purchase price of the home, and typically includes an end date upon which the renter (buyer) will payout the remaining balance owed to the seller. There can also be upfront fees that are held towards the purchase price. You may also be responsible for carrying out repairs and maintenance like a regular homeowner.

Rent-to-own is more common in countries around the world than in Canada, however in Canada it’s more common to see these arrangements in provinces that have very strong housing markets such as British Columbia and Ontario.

While rent-to-own has worked out for many people, I tend to caution buyers into entering this arrangement and encourage them to consult with both a lawyer and mortgage professional before signing the agreement.

Although often overlooked, this step is critical.

Lawyer:

A lawyer will review the agreement and give advice to ensure it’s not overly weighted in favour of the seller, help protect your rights and point out possible issues if the agreement doesn’t end with homeownership.

Mortgage Professional:

A mortgage professional will assess your income, debts, down payment and credit history to determine if a mortgage approval is possible now or in the near future. If it isn’t possible, you’ll be provided with information on what needs to change to move the application toward the best chances of approval.

For example, perhaps certain debts need to be paid in full, household income would need to increase or the agreed upon purchase price would need to be changed.

Why is a Mortgage Required?

If you are going to rent from the seller indefinitely until the agreed upon purchase price is paid in full, this is essentially a private mortgage (rent is the interest and the remainder goes to principle) and you do not need a separate mortgage.

However, this is rare because most homeowners typically take 20-30 years to pay a mortgage in full, and most sellers do not want to be in an arrangement for that length of time. Additionally, many life events happen during this time and you must ask yourself what happens to the equity you’ve paid if you choose to move.

Instead, the agreement is usually for a specific period of time (such as 1-5 years) and at the end of that term, the renter is expected to obtain a mortgage for the remainder of the money owed to the seller.

The Bottom Line

In theory rent-to-own sounds like a great opportunity, however in my experience the buyer usually does not consult a mortgage professional at the onset of the agreement and for one reason or another they are unable to qualify, or their situation has worsened/not improved enough to qualify for a mortgage at the end of the rent-to-own term. At that point, the seller usually wants to sell the property and the buyer must move – and unfortunately, loses the funds paid.

Rent-to-own options can work, but it takes a special kind of circumstance on all sides for it to be successful and beneficial to the buyer. Be sure to do the math, consider potential issues, research the seller (ask for references!) and consult a lawyer and mortgage professional.

I’m always here for your questions – reach out anytime!

Sarah Nixon-Miller, Mortgage Broker
Nixon-Miller Mortgages Inc.
TMG The Mortgage Group
902-225-7077
Toll-free 1-844-315-6609
sarahnm@mortgagegroup.com