Rent-to-Own Homes In Canada: How Does It Work?

The Canadian housing market has been surprisingly volatile over the past few years. This has made it difficult for young Canadians to enter the housing market and forced them to look for creative alternatives for entering the market. 

One of the unique ways that people do this is by entering rent-to-own agreements. Rent-to-own contracts are a fantastic tool that you can use to gradually work your way towards homeownership.

If you’ve never heard the term “rent-to-own in Canada”, that’s ok! Today’s post will teach you everything you need to know about entering into a rent-to-own agreement in Canada.

Continue reading to learn more.

What is rent-to-own in Canada?

A rent-to-own agreement is a unique type of contract between a landlord and a tenant. You are still expected to make monthly rental payments if you enter a rent-to-own agreement. However, a portion of each rental payment is set aside by your landlord under the condition that you will (or may) purchase the home after the rental period has ended. 

The portion of the rental payment that is set aside is generally referred to as “rent credit”. In some cases, your landlord may require you to make additional payments on top of your monthly rent in order to qualify for rent credit.

Renters that are thinking about entering a rent-to-own agreement should note that, in order to finalize the sale, they will still need to cover the remainder of the down payment, qualify for a mortgage and obtain the necessary forms of property insurance.

How do rent-to-own agreements work in Canada? — An expert guide for Canadian renters

Different types of rent-to-own agreements have their own sets of requirements and stipulations. The two primary types of rent-to-own agreements that you can enter in Canada are lease-purchase agreements and lease-option agreements.

What are lease-purchase agreements and how do they work in Canada?

A lease-purchase agreement is one of the most common types of rent-to-own agreements in Canada. If you enter a lease-purchase agreement, you are contractually obligated to purchase the home after the predetermined rental period has concluded. In most cases, landlords will require renters to make a non-refundable deposit in order to enter the agreement.

Should you choose not to purchase the home after the lease-purchase agreement has ended, you will most likely lose your deposit and your rent credit. In some cases, your landlord may have the right to charge additional fees. This is why it’s incredibly important for renters to read the fine print of their agreements if they want to rent-to-own in Canada.

What are lease-option agreements and how do they work in Canada?

Lease-option agreements are another common type of rent-to-own agreement in Canada. A lease-option agreement gives renters the opportunity to purchase the home after the predetermined rental period has ended. 

When you enter a lease-option agreement, you are by no means obligated to purchase the home afterward. You can choose to buy the home or relocate to a different property. This is the key difference between lease-option and lease-purchase agreements.

However, renters should note that, like lease-purchase agreements, you may lose access to your deposit if you choose not to purchase the home (you can reference the fine print of your lease to confirm if you’re eligible for your deposit or not). This is something that you need to consider before entering a rent-to-own agreement.

Should you enter a rent-to-own agreement in Canada?

There’s no black-and-white answer as to whether you should or shouldn’t enter a rent-to-own agreement in Canada. At the end of the day, it comes to your personal preferences, financial stability and where you see yourself in the future.

For instance, if you want to start a family and live in the same neighbourhood for the foreseeable future, then entering a rent-to-own agreement can help you get a step ahead of other prospective homeowners.

On the other hand, if you’re unsure where you’ll be in the near future, then entering a rent-to-own agreement may not make sense from a financial standpoint.

FAQ about rent-to-own in Canada

Here are some commonly asked questions about the rent-to-own process in Canada:

What is a rent-to-own home in Canada?

A rent-to-own home is a property that you initially rent (from a landlord or rent-to-own company) and a portion of your rent is set aside for a down payment.

How long do rent-to-own agreements last in Canada?

The length of the rental period will depend on what you and your landlord agree upon. Most landlords are open to renting their rent-to-own properties for one to five years before expecting the remainder of the down payment.

How can you find housing for rent-to-own in Canada?

Finding rent-to-own housing opportunities can be tricky, but it’s far from impossible. The best way to find rent-to-own housing is by reaching out to local landlords (or landlords in the area that you wish to move to). You can also find rent-to-own housing opportunities by reaching out to a rent-to-own company in your area.

How much is the non-refundable deposit for a rent-to-own home?

The size of the deposit for your rent-to-own home will depend on your landlord. Some landlords will ask you to deposit 1% of the property’s asking price, whereas other landlords will expect you to cover as much as 5% of the property’s asking price.

What are the pros and cons of rent-to-own homes?

The pros of rent-to-own homes include the following:

• It gives you the ability to live in the home while you save up for the remainder of the down payment
• It helps you lock in property prices early on, which can help you avoid paying more for the same property down the line
• It gives you a chance to see if homeownership is right for you (with minimal financial risk)

The cons of rent-to-own homes include the following:

• You can lose your deposit and rent credit if you don’t purchase the home
• The tenant is responsible for repairs during the rental period
• It isn’t guaranteed to improve your credit score

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