Is Rent-To-Own A Good Idea? The Pros and Cons
Are you thinking about rent-to-own? We break down the pros and cons to help you navigate the decision in today’s real estate market.
What is Rent-To-Own?
Purchasing a home in Canada has become increasingly challenging due to rising prices, pushing prospective buyers to explore unconventional methods. Rent-to-own agreements offer a unique approach, allowing tenants to save for a down payment while renting the property they plan to buy.
How Rent-To-Own Works
In Ontario, the process involves two key agreements: a lease agreement and an option to purchase agreement. These agreements outline essential details such as the lease term, rental price, down payment allocation, possession date, contract expiry date, and the home purchase price. Legal scrutiny is advised before entering into such agreements.
The tenant pays an option deposit, typically 2.0-2.5% of the purchase price, allowing them to live in the home and accumulate the necessary down payment over a specified period, say 3 years. Monthly rent and additional funds for the future down payment are essential components.
Pros of Rent-To-Own
- Credit Building: Helps provide the wiggle room to improve a low credit score while saving for a down payment.
- Test Drive: Allows tenants to live in and assess the property before committing.
Cons of Rent-To-Own
- Financial Risks: Loss of down payment if the decision not to purchase is made.
- Property Restrictions: Limited control over property modifications during the lease period.
- Market Fluctuations: Obligation to pay the original purchase price even if property values drop, or having to agree to pay more if home values increase.
Rent-to-Own Breakdown:
- Agreed Purchase Price: $425,000
- Option Deposit: $10,625 (2.5% of $425,000)
- Amount Owing After 3 Years: $414,375
- 5% Down Payment Required: $21,250
- Monthly Rent: $2100
- Extra Funds for Future Down Payment: $650/month
- Down Payment Saved After 3 Years: $23,400
- Amount Leftover After Putting Down 5%: $2150
So in the example the buyer has paid $75,600 in total rent over the term, and have saved $21,250 for a downpayment.
There is a bit of “leftover” funds that could be used to go towards closing costs, or be put down as additional payment towards the house financing as well.
Financial experts recommend caution, suggesting rent-to-own only as a last resort. When the rent-to-own period ends, when the renter goes to trigger their right to buy, they might still run into to some road blocks with finding a lender willing to sign off on financing. This cautionary advice underlines the importance of not only resolving current issues but also establishing a robust financial standing to secure mortgage financing at the end of the rental period.
The Bottom Line
Rent-to-own can be a viable option for those struggling to secure a mortgage. However, thorough research, legal consultation, and a solid agreement are imperative for a successful homebuying process.
