Rent-to-Own in Ontario: Is It Your Key to Home Ownership?
Rent-to-own agreements are an option for those wanting to buy a home but facing financial barriers. I get a lot of questions from clients about how rent-to-own works in Ontario, why some people opt-in to these types of agreements, the potential pros and cons to it, and whether or not it might be right for them.
Matt’s Stats
- Average down payment in Ontario in 2023: $120,000
- Percentage of Canadians who struggle with saving for a down payment: 36%
- Typical contract period for rent-to-own: 1-3 years*
What is Rent-to-Own?
Rent-to-own is a type of agreement where a tenant pays rent to the property owner, with an option to buy the home at a later date. Essentially, you’re renting while setting the groundwork for ownership. A portion of your rent often goes toward your eventual down payment, helping bridge the financial gap for those not yet ready to buy outright.
For many would-be buyers, especially first-timers, it’s a solution that creates a bridge between renting and owning, while allowing for more financial breathing room. It’s an attractive idea, but it’s crucial to understand how it works before signing on that dotted line.
How Does Rent-to-Own Work in Ontario?
In Ontario, rent-to-own agreements typically consist of a lease agreement and either a Option Agreement, or Purchase Agreement:
- The Lease Agreement: This is the rental portion, where you agree to rent the home for a set period, usually one to three years. During this time, you live in the home just like any other tenant would.
- The Option to Purchase Agreement: Provides the tenant with the choice to purchase the property at the end of the lease term without obligation. They’ll usually need to pay an “option fee” at the start, which could be anywhere between 2-2.5% of the home’s value.
- Lease Purchase Agreement: Requires the tenant to purchase the property at the end of the lease term. This structure creates higher stakes for the tenant but ensures the landlord’s intent to sell.
During the lease, a portion of your rent might be credited towards the down payment for when you exercise your option to buy. The keyphrase here is “might.” Not all rent-to-own deals are created equal, and this is an important area to read the fine print. In Ontario, rent-to-own agreements typically span a contract period of 1-3 years, which gives potential buyers time to improve their financial situation and secure a mortgage.
Rent-to-Own Breakdown:
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.
- 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
The Pros of Rent-to-Own
Build Equity While Renting: Unlike traditional renting, part of your monthly rent payment can help you build equity, making it feel like you’re working towards home ownership.
Lock in the Purchase Price: With home prices in Ontario as volatile as they’ve been lately, locking in a price today could pay off handsomely if the market appreciates.
Test Drive Your Home: Rent-to-own lets you try out the property and the neighbourhood before fully committing. It’s like a long-term home test drive—see how it feels in the winter, meet your neighbours, and learn the commute.
Down Payment Relief: For the 36% of Canadians who struggle with saving for a down payment, rent-to-own can be an appealing option because it allows them to build equity while renting.
The Risks and Drawbacks
Non-Refundable Costs: Most rent-to-own agreements require an upfront option fee, and this fee is generally non-refundable if you decide not to buy.
Risk of Losing Money: If you’re unable to qualify for a mortgage when the time comes, you could end up forfeiting both your option fee and any extra rent you paid toward the purchase.
Less Protection: The legal framework around rent-to-own is less regulated compared to traditional mortgages. If the property owner runs into financial trouble or fails to meet the obligations, you might be left in the lurch.
When Rent to Own goes Wrong: Jegasundaram v. Malhotra Holdings Inc., 2021 ONSC 4144.
In Jegasundaram v. Malhotra Holdings Inc., tenants entered a rent-to-own agreement, claiming they held equity in the property. The landlord asserted the agreement was primarily a rental contract. Disputes arose over rent payments and ownership status, culminating in eviction proceedings.
Court Findings:
The court found that the agreement lacked clarity, but upheld the LTB’s determination that the tenants were renters, not owners. It emphasized that claims related to equity payments should be addressed in civil court, not through the LTB.
Outcome:
The court dismissed the tenants’ appeal and upheld the eviction order due to substantial rent arrears. The court also criticized the tenants for delays and their failure to meet financial obligations.
Key Takeaways:
- Clear Agreements Are Crucial: Ambiguity in rent-to-own contracts can lead to disputes and adverse rulings.
- Jurisdictional Limits: Equity claims in rent-to-own agreements are beyond the LTB’s jurisdiction and must be pursued in civil court.
- Tenant Obligations: Non-payment of rent, even under disputed agreements, can lead to eviction regardless of equity claims.
- Legal Preparation: Independent legal advice is essential when entering complex agreements like rent-to-own.
This case underscores the necessity for thorough due diligence and clear contractual terms in rent-to-own agreements to protect the interests of both tenants and landlords.
For the full decision, refer to CanLII.
Note: The information provided is for general informational purposes only and does not constitute legal advice. For specific legal concerns, consult with a qualified legal professional.
Who Should Consider Rent-to-Own?
Rent-to-own isn’t for everyone. Usually those who opt-in to such agreements are in one or more of the following situations:
- Have difficulty saving for a down payment but can afford a slightly higher rent to account for the future equity.
- Expect their credit score to improve within the rental period, helping them secure a mortgage when the time comes.
- Are keen to buy a home soon but need a year or two to get their financial ducks in a row.
If you’re finding it tough to save up for that hefty Ontario down payment, rent-to-own might be the alternative that gets your foot in the door. Given that the average down payment in Ontario is around $120,000, many prospective buyers find it challenging to save that amount.
Matt’s Take: Is Rent-to-Own a Good Idea?
Personally, I see rent-to-own as a bit of a double-edged sword. It gives renters hope for future ownership and can be a bridge for those who aren’t quite mortgage-ready. Rent-to-own can provide a manageable alternative to help bridge this financial gap but the risks that come with that reward might come back to haunt you.
A major issue I see is the lack of flexibility—if your financial situation doesn’t improve as expected, you could end up in a worse position than if you had just rented traditionally. The biggest win is for buyers who feel very confident they can get their finances in order during the lease term and who are sure they want to stay in the property long-term.
There’s also the legal risks. One missed payment could mean a full forfeit of the purchase option agreement as well as any money paid towards it to date. Depending on how the agreement is worded, the owner could put the property up for sale before the agreed upon purchase option date, you’d be back to square one and the time (and potentially money) you spent during that period would be wasted.
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.
Rent-to-own might be your ticket to home ownership, but only if you know exactly what you’re getting into and have a clear plan. The devil, as always, is in the details—and in this case, the contract. If you’re considering this path, be sure to get legal advice before signing on the dotted line. And as always, reach out if you have questions about your options.
