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Everything you need to know about rent-to-own homeownership

Everything you need to know about rent-to-own homeownership

Last updated
Apr 2023
4 min
Written by
Chrissy Kapralos
Summary
  • Rent-to-own models involve paying higher rental payments and purchasing your rental home after a set period, with rent going toward the down payment. 
  • Canada already has rent-to-own developments popping up, with a substantial government budget dedicated to these programs. 
  • People with limited access to a down payment or poor credit can benefit from rent-to-own models. 
  • Rent-to-own contracts bring some risk, like causing financial loss to aspiring homebuyers if they can’t get a mortgage at the end of the term.
  • Lotly homebuyers benefit from a full down payment much faster than rent-to-own models. 

City living is expensive, but what could possibly eat up a whopping $2,500 from your bank account every month? Well, that’s the average rent for a one-bedroom in Toronto. It’s also pretty close to the average mortgage payment in Toronto, which is $2,895. 

What gives? It feels like if you could afford a rental payment, you could probably afford a mortgage in the GTA, too. But the issue is securing the down payment — here at Lotly, we solved this for should-be homeowners through our down payment assistance model. 

But another solution becoming more popular is the “rent-to-own” model. Imagine all your rental payments going toward a property instead. We’ll uncover how “rent-to-own” models work in Canada, the pros and cons, and why Lotly’s model might be more beneficial for your situation. 

What does “rent-to-own” mean?

Rent-to-own, also known as a lease purchase, is a model where you rent a home and rent payments go toward a down payment to eventually purchase that home, aka equity

The agreement usually indicates a closing date of 1-5 years after signing the contract. Plus, the landlord is legally bound not to sell the home to anyone else. 

However, rent-to-own contracts usually involve a higher monthly rent than usual, also known as rent premiums. You’ll also need to put down a deposit, which adds up to 1% to 10% of the home purchase price, with most agreements hovering around 5%. 

For example, one B.C. native describes a rent-to-own opportunity for a one-bedroom apartment as “free rent” while he saves up for his new home. The development requires $10,000 as a deposit, with $1,000 in rent per month. After two years, he’s responsible for coming up with a $470,000 mortgage.

Once the closing date approaches, you’re responsible for getting a mortgage for the remaining amount. 

Some rent-to-own agreements offer a period where you have the option to back out, also known as a lease-option agreement. But without such an agreement, backing out will cost you your deposit, rental payments, and even legal repercussions in some cases. 

Rent-to-own programs in Canada

Canada’s federal government launched the Affordable Housing Innovation Fund — a $550 million initiative to provide funding to developers that could address issues with the country’s current housing crisis. 

One stream of that fund is the Rent-to-Own stream, which funds developments for rent-to-own models that can prove success for tenants turned homebuyers within five years. 

A few rent-to-own developments and companies have popped up around the country, like: 

  • Rent to Own Canada, which helps clients build credit and join rent-to-own programs with 2-3 year agreements;
  • Homesey, which requires a 5% down payment

You might also consult your real estate agent or bank to learn more about rent-to-own programs in your area. 

Pros and cons of rent-to-own

Pros of rent-to-own

1. Helps eliminate the barrier of a down payment 

Most people pay rent elsewhere while simultaneously saving for a down payment. Over the course of a few years, the money spent is nearly doubled what you’d spend in a rent-to-own program. 

2. No need to move

Once you’re ready to purchase the home, there’s no need to waste money on moving expenses. Plus, you and your family will feel less stressed at a smoother transition. 

3. Locked-in purchase price

Toronto’s real estate prices have consistently increased since the year 2000, with the odd dip. A rent-to-own agreement locks in your purchase price and saves you the cost of real estate appreciation.

4. Time to rebuild your credit score

If your credit score is preventing you from obtaining a mortgage, a rent-to-own model gives you a couple of years to work on that credit.

Cons of rent-to-own

1. Pre-qualification is still necessary

Sure, you might not need a 20% down payment to qualify for rent-to-own. Still, most programs require a deposit between 1% to 5%, along with some credit score requirements. 

2. Higher rent 

You’ll usually pay higher rent in these models so that you can reach your down payment requirement faster. This could put a strain on your budget. 

3. Lost money if you decide not to buy

You might lose your deposit and rental payments if you back out of a rent-to-own agreement. This could look like simply deciding not to buy, receiving a mortgage rejection, or getting evicted by the landlord. 

4. Takes time

Most rent-to-own agreements take a minimum of two years before you can buy the home. This might work for someone with limited credit, but it’s not the fastest way to secure a down payment. 

5. Limited supply

Sellers might not feel motivated to accept a rent-to-own program because it delays their sale. Plus, you might have trouble finding rent-to-own agreements for your dream home since supply isn’t abundant yet. 

6. Fees

Rent-to-own programs aren’t neatly packaged as a direct equity exchange. If you do the math, you do pay more in maintenance and monthly rent premiums that might not all go toward your down payment. 

Get a down payment through Lotly!

Rent-to-own models are a step in the right direction for accessible and affordable housing. 

Still, you should always study your contract closely before making a commitment. You open yourself to some risks with rent-to-own programs, including losing your investment if you can’t get a mortgage. 

Lotly’s homebuyer program helps you access real estate equity without stressing about an entire down payment. Similar to some rent-to-own programs, we require a minimum of 5% down payment from our homebuyers, but we provide the rest to reach a 20% down payment immediately. If we’ve piqued your interest, check out our blogs, “What is down payment assistance?” and “What is shared equity?” to learn more. 

*Lotly GTA Fund I is closed as of December 2023. We will update you when the next fund opens.

Chrissy Kapralos
Writer & editor
Chrissy Kapralos runs a Toronto-based writing agency called No Worries Writing Co. She loves writing about personal finance and real estate topics and helping businesses communicate effectively with their customers. When she's not working, you can find her travelling, practicing yoga, or watching horror movies.