Renting is often the only option for Canadians, as buying a home can seem out of the picture with today’s high prices. However, there is a solution that can bridge the gap between renting and owning: rent-to-own homes. 

It’s a great option if you need more time to save and improve your finances. But what exactly does rent-to-own mean, and what does it look like? We’ll guide you through the entire process and discuss some key terms and info you’ll need to know. 

If you’re just getting started in the Canadian rental or home-buying landscape, check out these articles:

• Everything you need to know about renting in Canada

• Tenant rights while living in a rental property

What Is Rent-to-Own and How Does it Work? 

Rent-to-own, sometimes called lease-to-own, is an agreement between you and the landlord, typically for 1-5 years. You pay rent while living in the home, with the option to buy the property at the end of the term. 

Essentially, it’s a way to rent a home now with the option to buy it later. Here’s how it works:

You rent the home like you would with a normal rental agreement, paying a fixed monthly rent. Part of that rent payment goes towards the future purchase of the home. This is called a rent credit, which helps lower the amount you’ll need to pay when you decide to buy the home. 

Keep in mind that you may be paying a little more rent than the average prices in your area, as you’re essentially paying rent + an extra amount that goes towards the down payment. 

You also need to pay a one-time upfront fee called the option fee, which gives you the option to buy the house at a set price later. It is usually non-refundable but will count towards the final purchase price of the home. Typically, it’s 2-5% of the purchase price. 

At the end of the term, you can choose to buy the home. The option fee and rent credits will be put towards the purchase, making it cheaper than buying a home the traditional way. 

Here are a few things to keep in mind:

• If you don’t buy the home after the rent-to-own contract agreement ends, you will NOT get the rent credits or option fee back. 

• You still need to qualify for a mortgage at the end of the rental period. 

• There’s a common misconception that all your rent payments are put towards the final purchase price; however, only a portion of rent goes towards the future home purchase. 

Rent-to-Own Example

To make it easier to understand, here’s an example of a rent-to-own rental agreement:

Contract terms:

• Contract length: 5 years

• Monthly rent + rent credit: $1,600 + $400 ($2,000 total)

• Upfront payment/option fee: $10,000

• Purchase price of the home: $300,000

The rent credit is $400 monthly, so over five years, it will be $24,000. This is deducted from the final purchase price if you decide to buy. 

After the five years, the home will cost $266,000. Here’s how we calculate that:

$300,000 (purchase price) - $24,000 (rent credits) - $10,000 (option fee) = $266,000. 

Keep in mind that after the rental contract, you still need to meet the stress test requirements for getting a mortgage. You’ll need a good credit score and credit history, both of which you’ll have if you use the Chexy Credit Builder while renting. 

By using Chexy to pay your rent with a credit card and earn rewards or cashback on top of saving money over time for the down payment. Opting into the Credit Builder also allows your rent payments to be reported to Equifax, thus increasing your credit score over time. After five years, you’ll have a great credit history and easily get approved for a mortgage. 

Let’s say you use the Scotia Momentum Visa Infinite Card, which gives you 4% cash back on recurring payments (including rent!):

If your monthly rent is $2,000, you can earn $960 in cashback every year. Minus the Chexy fee, you’ll earn $540 in net cashback every single year. 

Over five years, you’ll have accumulated $2,700, which you can put towards the down payment on your home when you eventually buy it. 

Who Are Rent-to-Own Homes For?

Rent-to-own homes may be for you if:

• You want flexibility and are not sure if you want to buy the home at the end of the term

• You don’t qualify for a traditional loan (you have too low of a credit score or not enough money for a down payment)

• You are a newcomer to Canada 

Renting a home with the intention of buying it at the end can give you time to save money and improve your credit score. 

Photo by Travel-Cents on Unsplash

Types of Rent-to-Own Contracts

There are generally two types of rent-to-own contract agreements: lease-option and lease-purchase. Here’s the difference between the two: 

Lease-option agreements give you the option to purchase the property when the contract ends. You do not have to buy the home, but you have the option to. There are typically no extra fees involved, but if you walk away, you will lose the rent credits and option fee. 

Lease-purchase agreements lock you into purchasing the property at the end of the term, even if you do not want to. If you break this agreement and don’t want to buy, you’ll lose the option fee and rent credits and may face additional fines. 

It’s important to read your contract carefully and make sure you don’t get into an agreement that will cost you a lot to get out of. Even if you are sure you want to buy the property at the end of the term, it’s always advisable to get into a lease-option agreement, not a lease-purchase. 

Pros and Cons of Rent-to-Owning a Home 

Here are some top advantages and potential downsides of rent-to-own agreements:

Pros:

• Rent-to-own agreements give you time (typically 1-5 years) to save for a bigger downpayment while living in the home. 

• You can build your credit score by reporting your timely rent payments and using other credit-building methods. 

• You agree on a fixed price when you sign the contract, so even if the home price goes up later, you’ll still pay the price you agreed on earlier. 

• It is a unique way to test-drive owning a home and see if it’s for you. 

Cons:

• If you decide not to buy the property at the end of the term, you will lose the option fee and rent credits, which can be a lot of money. 

• You’ll likely pay above-market rent prices so that a portion of the payments can be set aside for the down payment. 

• You are responsible for all the repairs and maintenance to your home while living in it, not the landlord. 

• There is no guarantee that you will have saved enough money and improved your credit score enough to be approved for a mortgage at the end of the term. 

Getting Approved for a Mortgage After the Term

Once you are nearing the end of your rent-to-own contract, you’ll need to start looking for a mortgage. If you rent with Chexy, getting pre-approved for a mortgage with Homewise is easy. 

Simply log into your account, answer some preliminary questions, and submit your application. You should get a call from a Homewise advisor to discuss your preferences and get the process moving along. Read more about this process here. 

If you’ve improved your credit score and saved up some money during the rent-to-own term, you should have no problem getting qualified for a mortgage and buying your first home!

But if you’re just starting the process and entering a rent-to-own agreement, pay your rent with Chexy to earn rewards on top of one of your biggest monthly expenses.

Let your rent work for you. Get started with Chexy today. 

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