Rent-to-Own Homes in Ontario 2024

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Renting a house means that you will be paying rent with nothing to show for it once your lease is over. But what if you want to own a home in the future but cannot afford to purchase one today? Rent-to-own programs allow you to rent a home with the option to purchase it in the future.

A rent-to-own program in Ontario allows you to rent a home for a certain period of time, usually 2-5 years, with the option to buy the home during the lease tenure or at the end of it. During the lease period, you pay a monthly rent to the landlord or the rent to own company, a portion of which goes towards the home’s down payment for the purchase.

The rent-to-own agreement legally binds the landlord or the rent-to-own company that owns the home to sell the home to no one other than you during the option period of the contract. It also gives you the opportunity to lock in a future purchase price at the time of agreement.

Rent-to-own homes can be a useful alternative for those who are interested in buying a home but cannot do so in the conventional way. For example, those who want to buy a home but don’t have enough down payment saved or those who cannot qualify for a mortgage due to credit problems.

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Rent-to-own works in a similar fashion as a conventional rental agreement where you pay a monthly rent to the landlord. The difference is that this rent is higher than the typical rent for a comparable home because it also includes the component of rent credit. Rent credits are the portion of the rent that is set aside for the eventual down payment of the home. If you decide not to buy the home for any reason, you will likely lose all the saved rent credit.

Rent-to-own arrangements also require you to pay a non-refundable upfront fee, known as the ‘option fee,’ that gives you the option to buy the home. Rent-to-own companies may also call this a ‘down payment’ or an ‘option to purchase deposit.’ This fee is usually 1% - 5% of the purchase price of the home and is payable on the date of possession. The fee is typically applied towards the purchase price of the home if you choose to purchase the home.

In addition to the rental agreement, the arrangement also requires you to sign a rent-to-own agreement. There are two types of agreements:

• Lease-Option Agreement: This type of agreement gives you the option to purchase the home in the future, but you are obligated to do so. You have the option to walk away from the purchase with no legal consequences or penalties. Such agreements are also known as option-to-purchase agreements.
• Lease-Purchase Agreement: When you sign a lease-purchase agreement, you agree to buy the home at the end of the lease term. Failure to do so can result in legal action and penalties.

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A rent-to-own agreement includes all the details of the contract and the terms agreed upon while also outlining the responsibilities of each party. A typical agreement includes the following:

• Description of the property, such as its address
• Rent information, such as monthly rent amount, due date, etc.
• Important dates, such as the home legal possession date, the contract expiry date, and the date till which the property can be purchased
• The down payment or option fee and the monthly rent credits
• Agreed upon purchase price of the property
• Responsibilities of the tenant and landlord (who will pay for utilities, etc)

Rent-to-own homes can be a good option for renters who want to buy a home but do not meet the requirements for a conventional purchase or cannot afford to buy a home right now. Some of the main situations are listed below.

• Inadequate Downpayment: Those who want to buy a home but don’t have enough downpayment saved can consider rent-to-own. It allows renters to build up their savings, both directly through rent credits, which will eventually be applied towards the home purchase and indirectly through more time.
• Low Credit Score: A low credit score can prevent one from qualifying for a mortgage. Such individuals can work on improving their credit score during the lease period to meet the minimum credit score requirement to get a mortgage. This may increase the likelihood of approval for a mortgage or access to more favourable mortgage rates. You can also use a rent vs. buy calculator to see which one is better suited for your financial situation.
• Can’t Meet Income Requirement: If someone cannot qualify for a mortgage due to inadequate income, they can choose a rent-to-own option and work on increasing their income during the lease term.
• Individuals With Non-Traditional Income: Due to strict underwriting guidelines, individuals with non-traditional income, such as self-employed people, often require a higher downpayment (20% - 40%) to qualify for a mortgage. Such individuals can consider rent-to-own to build up the down payment.

Before deciding to rent-to-own, you should be aware of all its advantages and disadvantages. The table below lists all the pros and cons of rent-to-own.

There are several ways you can find rent-to-own homes in your vicinity:

• You can negotiate a rent-to-own agreement for a home you are currently renting.
• Some home sellers may be willing to enter a rent-to-own arrangement, as they can earn rental income from the property and lock in a higher purchase price for the home's sale than its current value.
• There are several rent-to-own companies that allow you to pick any home available on the market for a rent-to-own arrangement. Such companies, however, set a limit for the home’s purchase price and down payment, and you will have to select a property that falls within the limits.
• Some local rent-to-own companies have a portfolio of properties that you can pick from. These are usually investor’s properties and may be available for a lower down payment or fees.

Rent-to-own companies usually operate within a city, region or province, and you can find the companies operating in your area by running a search for “rent-to-own homes near me” on a search engine.

There are several rent-to-own companies operating in Ontario. Most rent-to-own companies operate locally and provide services in a particular region or city. Listed below are the rent-to-own companies operating in different parts of Ontario.

Rent to Own Toronto

Some rent-to-own companies and brokers in the GTA, including Toronto, Mississauga, and Brampton include:

Rent to Own Brantford

Rent to Own Barrie

Rent to Own Sudbury

Rent to Own Oshawa

Rent to Own London and St. Thomas

Rent to Own Hamilton

Rent to Own Ottawa

Income Requirement

The minimum income that rent-to-own companies require will depend on your mortgage affordability. The higher your income, the more you can borrow with a mortgage. Clover Properties, a rent-to-own company based in Ontario, has a general minimum income requirement of $50,000. Pumpkin Homes, a rent-to-own company in Barrie, Ontario, has a household income requirement of $75,000, with at least two years of employment.

Typically, you or your spouse/partner must be employed to qualify for a rent-to-own program. If you have a steady employment history and can prove that you can comfortably afford your monthly rent-to-own payments, then you can expect to be approved.

Downpayment or Option Fee

Most rent-to-own programs require you to make a mandatory upfront payment to get the option to purchase the property. The fee is usually 1% - 5% of the agreed-upon purchase price of the home and is usually due on the date of possession. You may be able to negotiate the fee, but you won’t qualify for the program if you cannot pay this fee.

The fee is non-refundable, which means you won’t get it back if you decide against the purchase. However, the amount is applied towards the purchase price of the home if you end up purchasing it.

If you choose not to buy a rent-to-home, you will lose your option fee deposit and your rent credits. Just like when any ordinary lease agreement expires, you will simply move out of the home as usual.

Some rent-to-own companies refund a portion of your accumulated rent credits in certain cases. For example, if you’ve followed their credit repair program and tried your best to qualify for a mortgage but were not approved, then they may provide a partial refund. This can range from 25% back or more. However, if you haven’t been making efforts to get your financial situation in order and have been delinquent, they might not offer any refund.

If you can’t purchase the home, the rent-to-own company might decide to work out an agreement, such as extending your rent-to-own term for another term, which will give you time to improve your credit and save for an even larger down payment. Regular home sellers who have entered into a rent-to-own agreement with a buyer might not even want the home back because the home seller entered into the agreement to sell the home and not to become a temporary landlord for a few years.

Depending on your contract, you might be legally obligated to purchase the home. Lease-purchase contracts, or lease-purchase agreements, require you to purchase the home. You may face legal issues if you don’t purchase the home, irrespective of the reason.

Also called a downpayment or a deposit, an option fee is an upfront and non-refundable fee that you pay in exchange for the option to purchase the home in the future. If you do exercise the option to purchase the home, the amount of the option fee can be applied against the price of the home; however, you cannot get this fee back if you choose not to purchase the home. The landlord may also forfeit this fee if you default on your rent payments or break any term of the lease.

The option fee is generally negotiable and typically falls in the range of 1% to 5% of the purchase price of the home. Rent-to-own homes with no down payment are extremely rare, but they can be an option at some companies. Meanwhile, not all rent-to-own companies allow a low initial down payment. Such programs are better suited for home buyers who have enough savings but don’t have enough credit to qualify for a mortgage.

A lower option fee or initial down payment will likely result in higher monthly payments. That’s because you still need to make up a minimum down payment by the end of your rental term. Paying a larger initial deposit will give you the ability to have lower monthly payments, as less will need to go toward your down payment savings.

The rent-to-purchase agreement will be valid for a set period of time; otherwise, your option will be valid indefinitely. This period, known as the option period, usually ranges from one year to five years, and the tenant can exercise their option to buy the home during this time. Instead of a period of time when you can purchase, your agreement might specify a certain date when you must purchase.

Most rent-to-own companies have an average contract length of three years. This gives just enough time for the renter to save up for a down payment while not taking too long and tying up the home. However, the contract length can be longer or shorter depending on your finances.

Early purchases will generally be at the specified purchase price laid out in the rent-to-own agreement, which has a set amount of appreciation built in. By purchasing early, you will be paying this appreciation upfront.

A purchase price for the home might be negotiated in advance, such as the current value of the property, or the purchase price can be the value of the home when the option is exercised. For longer option periods, such as five years, the purchase price will usually be determined based on the value at the time the option is exercised rather than set when the contract is signed, as home values can significantly change.

If you do decide to lock in the home's purchase price when signing your rental contract, the agreed home value may be significantly higher than current market values. This makes it somewhat risky for a rent-to-own buyer, as the home’s market value may not appreciate up to the purchase price of the home.

The future purchase price of a rent-to-own home is usually determined based on a set expected appreciation rate for your local market. For example, a certain rent-to-own company in Toronto prices the appreciation as 3.5% to 4.5% per year. If a home is currently $500,000, the rent-to-own purchase price after a 3-year term at a 4.5% annual appreciation would be:

• Today: $500,000
• Year 1: $522,500
• Year 2: $546,012
• Year 3: $570,583

You will be paying about $70,000 more than the home’s current value. If the value of the home increases more than your set purchase price, then the difference is yours to keep. Since the locked-in purchase price usually tends to be higher than current home prices, this means, in practice, buying a home through a rent-to-own home program will be the same as buying a home regularly on the market in the future for the same time period.

However, some rent-to-own companies may factor in significant price appreciations, which will cause you to pay more. Therefore, it is important to consider the applicable markup or price appreciation before selecting a rent-to-own company.

A percentage of your monthly rent payments, known as rent credits, will be set aside for a downpayment. This percentage can vary based on what the landlord and renter agree upon but is usually 25% or more.

These rent credits will be placed into a separate escrow account by your landlord or rent-to-own company and applied towards the agreed-upon price of the home either directly or refunded to you at the time of purchase. However, not purchasing the home will mean that you will lose your rent credits.

The specific amount of your rent credits will depend on how much more you need to save in order to meet a mortgage lender’s minimum down payment requirements within your rental term and are added on top of the rent payments.

Rent-to-own companies usually charge rent (excluding rent credits) based on current market rental rates, with the minimum being at least enough to cover their monthly mortgage payments. For example, if Calgary’s average monthly rent was $1,000, but a mortgage for the property would cost $1,500 per month, then the rent-to-own company would charge at least $1,500 per month. The opposite is also true. If Winnipeg’s average monthly rent was $2,000, but a mortgage costs $1,500 per month, then the rent-to-own company would charge $2,000 monthly rent.

The monthly payment would typically require two cheques to be made out every month. That’s because your rent payments need to be separate from your rent credit so that they can be saved up and “refunded” back to you when it is time to buy the home. Essentially, the rent credits are a way to force you to save up for an adequate down payment from your own resources.

Some rent-to-own companies may collect the whole monthly payment as one and simply deduct your rent credits from your home’s purchase price. This would mean a discount was made on the price and won’t be counted as a down payment from you.

When renting, the landlord is typically responsible for maintenance and repairs to the property. However, responsibilities may vary depending on your rent-to-own contract. While you might be responsible for mowing the lawn or snow removal, you might not be responsible for things like a damaged roof while you are renting. You may even be responsible for all repair expenses.

Some rent-to-own companies liken this to treating the home as your actual home. The renter will eventually buy the home, so they might as well be paying for its upkeep and maintenance. However, you can be restricted from certain actions, such as renovating the home or even painting the walls of a room. You will also need permission from the rent-to-own company to make changes or alterations to the home before you have actually purchased the home.

You will be responsible for the regular costs of homeownership, which in turn are also costs for renters. This includes utilities, such as electricity, water, and gas, along with phone, internet, cable, and renter’s insurance.

The rent-to-own company is responsible for the property's costs, such as the mortgage, property taxes, and home insurance.

If home prices in the market change more or less than the expected change in your agreement, it will impact whether purchasing or not purchasing would be a better choice.

If home prices increase more than the rate that you locked in, then purchasing the home would allow you to gain that appreciation in price.

If home prices decrease, your locked-in price will be more expensive. It would be better not to purchase the home at a certain point.

Scenario 1: Home Price Increases

In the above scenario, the home’s market price has appreciated by $30,000 more than the locked-in purchase price; thus, the buyer would make an additional $30,000 if they choose to buy the home.

Scenario 2: Home Price Decreases

In the above scenario, the home’s market price has depreciated by $30,000 from the locked-in purchase price. If the buyer chooses not to buy the home, they will lose $8,000, but it might still be better than buying the home, in which case the buyer will lose $30,000.

Some people have fallen prey to scammers who carry out fraudulent activities under the guise of rent-to-own. Scammers may pose as landlords looking to engage in a rent-to-own arrangement for a property they don’t own and ask you for an upfront deposit, and tend to disappear once you pay them the deposit.

You can avoid falling into such a trap by opting for a rent-to-own company that is a part of the CAROP (Canadian Association of Rent to Own Professionals). CAROP is a professional association of professionals in the rent-to-own industry. Members of CAROP are required to meet specific eligibility requirements and adhere to the association’s code of conduct. Although it is not mandatory for companies to be a part of CAROP, choosing a CAROP member can assure you that you are working with a trustworthy and professional company.