What Is Rent To Own?

April 22nd, 2016 Posted in Economy|Mortgage 101

The Rules of Rent To Own In Canada

 

 

 

 

 

The Rules of Rent To Own In Canada

When you want to rent-to-own within Canada, there are some things you need to be aware of before venturing down that road. First, a bit of an explanation of what rent-to-own actually is. Rent-to-own is an agreement where a rental lease and purchase agreement between a tenant and owner is put in place to purchase the property at a fixed price at a specified point of time. With rent-to-own, you agree that five years down the road, you will purchase the house for the price that it is valued at when you reach that point. When you pay rent on the house, the rent goes towards the value of the house, hence the term rent-to-own. So, you pay each month towards the payment of the house, then you buy the house for what it is worth at the point when the term ends.

As the renter, there are many reasons that a rent-to-own property would be a good idea for you. Obviously, the biggest benefit is if you have bad credit and want to buy a home but need to improve your credit first. As well, if you don’t have much money at this moment, or you don’t have a large down payment, then rent-to-own is a very good idea.

In regards to your down payment, the owner of the property is required to accept the down payment that you have. There is no minimum amount, within reason, and that is a big benefit of the rent-to-own system. The down payment typically will be two month’s rent on the home. So, if you are paying $1,000 per month, then you will pay $2,000 as a down payment. Obviously, the more of a down payment you have, the less you will pay for the house over the course of the terms.

The rent you pay is going to pay off the home. Each month that you put money into the bank for rent, you are paying off your home. Typically, you will have a term that is going to be five to ten years. Each month that you pay rent, you pay off the home towards the end of that term. Once the term is over, you then buy the home with a mortgage. Here is an example to help you. So, you agree with the seller that you will rent-to-own for five years at $1,000 per month. Over that five years, you pay off $60,000. That leaves $240,000 on the mortgage, minus your $2,000 down payment. At this point, you need to get a mortgage for $238,000.

Lastly, you need to agree on a price with the seller. The price you pay will depend on the market. When the market is up, you pay more. When the market is down, you pay less, it is as simple as that. Once you agree upon a price with the seller, the seller is committed to that price no matter if the value of the house changes. This can be good if the value goes up but bad if the value goes down.

Before getting into any rent-to-own program, always do your research and make sure this is the best option to be a home owner based on your situation.

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