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Rent-to-own Is Becoming More Popular InCanada-Here’s How It Works

A man from British Columbia found the rent-to-own program similar to receiving two years of free rent while he saves money to obtain a first mortgage. 

Christian Fracchia entered a lottery for 30 units when he first learned about a rent-to-own opportunity in Port Moody, British Columbia, four years ago. He saw it as a means to fulfill his dream of becoming a first-time homeowner.

Nearly 10 per cent of the 358 units under construction at 50 Electronic Avenue are sold as rent-to-own. It suggests buyers who would pay a set rent for two years before turning that money into equity. 

The 28-year-old software developer Fracchia will get a tour of his brand-new one-bedroom apartment next week, which is close to a seaside park and the SkyTrain. All this is for a $10,000 down payment and $1,000 monthly rent, which will be used for the $470,000 home’s down payment in two years.

Rent-to-own is a unique route to house ownership that puts off making a sizable down payment, one of the main obstacles for first-time homebuyers.

Advocates claim that this type of mortgage financing enables those with restricted credit who aren’t eligible for a conventional mortgage to take steps toward homeownership.

However, critics warn that rent-to-own is untested and comes with some threats and risks, such as maintenance expenses or the possibility of losing the down payment in some circumstances if a tenant doesn’t follow the agreement’s terms.

As part of a $2 billion investment to double home construction over the next ten years, Canada is funding further projects similar to this one by establishing a rent-to-own housing program. 

The financing, allotted in previous budgets, is intended to build 17,000 new homes around the nation, including more reasonable housing for homeless individuals or at risk of becoming so, as well as projects for market-rate and cheap accommodation.

The rent-to-own initiative and funding 

$200 million of that $2 billion will go into a brand-new rent-to-own initiative. Justin Trudeau, the prime minister, stated at a news conference in Kitchener, Ontario, on August 30. 

The Canada Mortgage and Housing Corp. (CMHC) manages this fund, encouraging builders and developers to provide more options for first-time homebuyers struggling with the down payment requirements.

Saving money to purchase a home is getting harder for many renters. Trudeau said that the government would collaborate with housing providers through this new program to assist families in transitioning from renting to owning their homes. 

Municipalities, developers, homebuilders, community housing groups, non-profits, and Indigenous organizations can now submit applications to the five-year Affordable Housing Innovation Fund and its new rent-to-own stream. The applications opened on August 30. 

About five hundred people applied when the Panatch Group offered rent-to-own apartments in Port Moody in 2018.

Richmond, British Columbia, developer Kush Panatch said he’d never offered rent-to-own before and was astounded by the intense interest.

After reading comments, including one from Fracchia, who wanted to stay in the neighbourhood he loved, Panatch ultimately decided to invite only Port Moody residents.

Despite being thrilling, Panatch warns that rent-to-own is not necessarily the best route to property ownership. 

He learned about unforeseen expenses, such as his business having to cover the GST cost from when the tenant moved in until they purchased the unit. There were complex legal issues to understand as well. According to Panatch, rising interest rates also increased the program’s cost.

How does the rent-to-own program work?

A rent-to-own deal has different stipulations. In general, it’s a contract between tenants, landlords, or investors to purchase a house at a predetermined price at a future date. The contract consists of a lease and a purchase option.

The purpose is to hold the home for the prospective buyer while they accumulate the necessary savings to be approved for a traditional mortgage with a lending institution.

A private rent-to-own program sponsored by Rachel Oliver of Clover Properties, north of Toronto, has allegedly aided 600 Ontario families in “fast-tracking their ability to get closer to home ownership.”

According to Oliver, the tenant often makes a lump sum down payment (her company typically asks for $20,000) and then monthly rent based on the amount needed to reach 10% of the property’s purchase price by the end of the lease. The cost of holding the property at the current interest rate is also factored into the monthly rent calculation.

The renter is frequently also responsible for covering the costs for repairs and improvements to the house or condo unit over the renting period.

How is rent-to-own beneficial?

Oliver says her customers can lock the home’s purchase price, for instance, at $600,000 at the beginning of a rent-to-own agreement with plans to purchase in five years.

Then, if the property value increases to $650,000, the renter can keep the increase in the value of the house they agreed to purchase. 

The mortgage is held by an investor or, in other circumstances, a developer during this time. Although rents for rent-to-own arrangements might vary, they are currently typically in line with market rentals.

For the renter to build equity and become a first-time homeowner much more quickly than they could save, Oliver and her husband work with investors who take the debt burden.

Given the growing demand from families to purchase a property before prices rise too high, Clover Properties is expanding into Alberta and Quebec.

According to Oliver, renters who are having trouble getting a mortgage approval because of low income or damaged credit would benefit most from rent-to-own.

The risks involved 

Oliver also emphasizes the importance of commitment for rent-to-owners. She claims that some lost down payments during the pandemic due to clients being unable to honour their commitments due to family breakups or other misfortunes and being forced to leave.

A breach of the contract would occur if they stopped making payments on schedule or at the agreed-upon rate. So companies try to work with people in this circumstance. But, unfortunately, renters will be forced to vacate the property and give up their down payment credits once all other options have been exhausted, says Oliver. 

Additionally, rent-to-owners frequently cover the cost of maintenance and upgrades, unlike typical tenants.

Oliver applauds the government for looking into a novel homebuying strategy. Still, she is frustrated that the new federal fund only supports development initiatives and forbids rent-to-owners from shopping for resale properties on the open market.

In essence, they are funding developers. Hopefully, the contractors would pass on savings to the customer, says Oliver, who thinks developers should work with knowledgeable rent-to-own companies to manage the complex contracts.

Presented by CTC News