The current Canadian real estate market is best described as competitive. Given that the average home price has increased by 19.3% in the last year, it’s not hard to see why either.

While there are plenty of options on the market, it’s not uncommon for Canadian homebuyers to have trouble saving enough money for the downpayment on a property.

So, what happens when your dream home is a bit out of your budget? Do you try to borrow some money from your family for a down payment? Or do you look elsewhere for smaller, more affordable properties instead?

One option not many first-time homebuyers are aware of is rent-to-own, which can help significantly if you’re having trouble coming up with the money for a down payment.

What Is Rent-To-Own?

You, the tenant, make an agreement with the landlord to start renting the property while setting aside money each time for the down payment. Once you have enough, then you’ll simply purchase the property outright.

In other words, you are renting the home that you intend to buy in the future and will save up money each period for the down payment.

How Does It Work in Ontario?

If you’re interested in renting to own, always have your lawyer ready to discuss the legal contracts you will be making. Two that should stand out to you are the lease agreement and the Option to Purchase agreement.

Both of these documents cover aspects of the home buying process:

  • The rent
  • The amount set aside each month for the down payment
  • Period of leasing
  • Time you take possession of the property
  • Purchase price of the property
  • Contract expiration date

The Option to Purchase, which catalyzes the rent-to-own process, may involve a fee known as the option deposit, which might range from 2.0 to 2.5% of the purchase price. You will need some type of upfront payment, but it will be considerably less than a down payment you’d otherwise cover.

Is It Right For Me?

No matter what your situation, the rent-to-own option should be on your consideration list when searching for a new property. At the same time, it isn’t perfect in all circumstances, so look at your options carefully.

Advantages of Rent-To-Own

The obvious reason why a homebuyer would be interested in this option is financial. For example, if you can’t obtain a mortgage because your credit score is too low, you can use the rental period as a way to build up credit first instead of having to do it elsewhere.

The Option to Purchase agreement also forces the tenant and landlord to agree upon a purchase price early on. Even if the value of the property goes up in the future, you still only have to pay the original agreed price.

From another perspective, rent-to-own allows you to live in the new property for a period first before dedicating to the mortgage. You will be more sure that you want the home first before making the down payment.

Disadvantages of Rent-To-Own

There are several potential downsides to the Option to Purchase agreement worth knowing about first. If you’re looking to try the process out, you will need the following.

  • Dedication: You need to know that you can dedicate to the house after the leasing period ends. If you choose not to purchase, you aren’t guaranteed to keep the money you saved towards the down payment.
  • Financial stability: Make sure not to miss a rent payment during the lease, or you risk becoming noncompliant with the contract terms. You also have to qualify for the mortgage once the renting period ends.
  • Market research: If the value of the property drops while you’re leasing it, you still need to stick to the original agreed-upon purchase price.
  • Willingness to lease: Since you’re only renting the property for the first few months or years, there may be restrictions on what you can do there.

To ensure that you can dedicate to purchasing the home later, we recommend negotiating for a home inspection first so that you don’t uncover any problems you didn’t know about during the renting process.

Admittedly, renting to own is a fairly uncommon practice in Canada. With home values appreciating every year, most sellers don’t want to risk missing out on an increasing price, and a rent-to-own process forces them to set an original purchase price in stone.

Making Your Decision

The tenant must ultimately decide whether the associated risk is worth the benefit for a rent-to-own arrangement. You have to know that you can achieve the mortgage at the end of the leasing period to draw a return on your investment.

Depending on your financial situation then and now, you may consider either going for the agreement or just building your credit up by renting elsewhere first.

And don’t forget about insurance. You may need to consider landlord insurance during the leasing period or renters insurance to protect your belongings. Expect to pay around $12 to $30 a month for it.

Find the Perfect Real Estate Agent To Help

Purchasing your new home is a large life decision. Regardless of how set you are on aiming for the rent-to-own agreement, talking with your lawyer and real estate agent is heavily recommended so that you understand all the details of a potentially complex contract.

If you’re around the Toronto area and are interested in the lucrative real estate market in the region, make sure you have an experienced real estate agent at your side. Joel Cooper has been working with dozens of individuals and families to help them achieve their dream homes. Find out today how he can help you.

Hi, I’m Joel, a real estate professional based in Toronto.

My approach is simple—I put you first. I believe in open communication, total transparency, and meaningful results. I’ll guide you through the real estate process, market values, and always keep the focus on you—and your needs.