The Government of Canada has developed a special assistance program for Canadians who are struggling with problems related to a home purchase – rent to own homes.
For many Canadians, buying a personal residence is a lifelong dream. When circumstances are favorable and the thought arises in your mind that now is the perfect time to realize your dream and buy a property, you start looking around the market. However, taking out a mortgage is not a simple process –you need to meet certain conditions to be approved. If you find yourself in a situation where you do not meet the set requirements – such as the amount of the down payment or the number of credits – you can look for subsidy programs.
In Canada, there is a program called Rent-to-own that is designed to help citizens with bad credit or lack of financial savings. The rent-to-own homes program could be a perfect option for people who are serious about owning a particular property as well.
How does this program “rent to own homes” work?
Under this program, a prospective buyer of the mansion can sign a contract with a landlord to rent the home in which they plan to live in the coming years. The contract between the prospective buyer and the landlord cannot be verbal but must be prepared in a cautious way and legally binding.
According to the common rules, there can be two types of agreements:
- “Lease-purchase” contract. This document assumes that at the end of the contract period, the sale of the house is determined.
- “Option-to-purchase” agreement. This document does not specify that the house is to be sold. The tenant is not obligated to buy the house when the term of the contract ends. Even more, he can terminate the contract at any time if he decides he no longer wants to live in the house.
It should be noted that each contract is different from the other. The terms of the contract usually depend on the results of the negotiations between the tenant and the landlord.
Under the established rules, the property remains registered in the name of the owner until the contract ends and the house is sold. Tenants pay rent to the homeowner, usually on a monthly basis. If the owner of the house is still mortgaged, he can use his income from the rent to cover his monthly payments on the loan.
The benefit to the renter is that he begins to live in the house he has his eye on. His monthly payments are split into two various parts: a large portion for rent, and a smaller portion for the down payment. By making these regular payments, he achieves two financial goals – he improves his credit history and starts saving for the down payment needed to buy the house.
There are some nuances that should be noted separately.
The “Option money”
Under the established rules, the prospective tenant would have to pay a monetary deposit called an “option consideration”. The amount of the deposit can be negotiated and ranges from 2% to 5% of the total price of the residence, the fee is non-returnable. The tenant concludes a separate contract with the landlord that determines the size of the deposit. If the tenant does not plan to purchase a home as the contract ends, they can discuss with the landlord the possibility of not making payments for the “option money”. The condition that could also be included in the contract is whether the fee paid for the “option money” can be considered as a down payment for the future house. However, this option depends only on the results of your negotiations with the landlord.
The rent
The regular payments would begin as soon as the contract is signed. The usual condition for the payments is that they should be made monthly. The typical duration of the payments is one to three years. The total of the regular payments made on the monthly basis is usually divided into two parts – the larger part (about 75%) is used to cover the rental costs, while the remaining part (25%) is for the down payment.
The idea of the program is that once the lease is over, the tenant can complete their down payment payments and significantly improve their credit score. Once these conditions are met, the tenant can apply to CMHC for insurance and purchase the home. If there are no plans to purchase a home and the contract makes this point of purchase optional, the deal would be over when the contract ends.
The final price for the property
If a tenant has decided to purchase a mansion, the question of sale arises at the end of the agreement. Usually, tenants prefer to have the set price in the contract from the start, as there can be price fluctuations in the property market. However, some lenders insist that the final price is not set until the end of the contract and is based on the estimated value of the house.
Example from life
Let us consider the situation where the lease-purchase is for 2 years. The set price for the rental is $750 per month, the additional $350 per month for the down payment. Here is an example of the calculations:
- The fixed price for the house – $200, 000
- The “option money” (2.5%) – $5, 000
- The loan amount remaining as the term of the rent ends – $195, 000
- The amount of regular monthly payments – $750
- The monthly portion for the down payment – $350
- The annual payment for the down payment – $4 200
- The payment for the down payment in two years – $8 400
- The loan amount that would remain at the end of the contract is – $186 600 ($195, 000 – $8 400)
Using these calculations, we can see that the future buyer would have already saved $8 400 for the down payment at the end of the contract period.
It should be separately noted that the amount paid for rent during these two years is $18,000. This sum is not counted as payments on the mortgage; they are separate payments.
In total, the potential buyer has invested $31,400 in the home, but only $13,400 would be assessed as payments toward the future mortgage.
Pros and Cons of Rent To Own Homes Program
Like any other program, this one has its advantages and disadvantages. In this particular case, the benefits and drawbacks should be considered from both sides – a landlord and a tenant.
From the point of view of a landlord / investor
Advantages:
- A homeowner can make a substantial income from the monthly payments for the rent
- Since people in Canada prefer to live in houses rather than small apartments, the owner can set a higher rent for a good house
- Generally, the financial obligations for repairs and renovations in the house lie with the tenants, even if the property is still registered in the landlord’s name
- In case of a “lease-purchase” agreement, the owner of the residence not only keeps the money from the rent, but also receives money when the house is sold
- If both sides have agreed on an option to purchase, the ‘option money’ can be collected upfront. If the tenant decides not to buy the house, the landlord is not obliged to refund the deposit
Disadvantages:
- The landlord is forced to spend a lot of time on tenant screening
- If the landlord and tenant have agreed on an option to purchase, the tenant has the right to get out of the deal at any time. If the tenant decides not to buy the house, the landlord must go through the screening process again
- Since the house is registered in the landlord’s name, he is required to make payments on the mortgage (the rent payments only cover these expenses)
From the point of view of a tenant
Advantages:
- If the landlord and tenant have agreed on an option to purchase, the tenant can take a trial period of living in the house. With this agreement, he can terminate the lease at any time if he does not like the house
- If the tenant makes his monthly payments, his credit score will increase
- A smaller portion of the amount paid for the rent goes toward the initial contribution – a good opportunity for people who do not have savings
- If the landlord agrees, the price of the house can be locked in so that even at the end of the lease the market value of the house is higher, the sale price of the house remains the same
Disadvantages:
- If the tenant were to improve his credit to the required values by the end of the lease, he could not buy a house
- If in case of an option to purchase the tenant decides not to buy the house, the landlord is not obliged to repay the “option-consideration”
- Despite the fact that the property is registered in the landlord’s name, the financial obligations for repairs or renovations in the house lie with the tenant. In addition, under the conditions of contract the tenant is to make payments for property taxes or any type of insurance
- If the tenant stops his payments to the landlord, the house can be foreclosed on
- Some landlords take strict action in the event that tenants fail to make payments for the rent for several months – they may threaten legal action against the tenant
- Since rent payments on the house are usually combined with other house-related expenses, the tenant may find himself in a situation where his expenses on the house are higher than the actual value of the house. There is a risk that the tenant may not recover his investment even if he decides to resell the house in the future
Rent To Own Homes: Final thoughts
The main purpose of the program is to help Canadian people realize their life goal of purchasing a house. The program opens up a way for people who don’t meet CMHC requirements to buy a property, improve their credit history and start saving for the down payment.