Renting a home with the option to buy

Written by Anthony Michael

Updated June 12, 2024 | Published October 5, 2023

In Canada, homeownership presents many challenges: fluctuating interest rates, hot real estate markets, tighter standards for mortgage approvals… these things (and many others) can shatter the dream of getting the keys to your own home. While renting is an option, you may not like the idea of forking over your hard-earned savings to a landlord with no return on investment.

But what if you could combine both? Rent-to-own, or renting with an option to purchase, is another possibility for would-be homeowners. Read on to find out how renting to own works, plus some of the advantages and risks involved.

Thumbnail with keys dangling from the lock on the front door of a home

What is rent-to-own?

Renting a condo or a house with the possibility of eventually owning it is an option for potential first-time homebuyers. Particularly, those who are not eligible for a traditional mortgage or do not have enough funds to meet the down payment requirements.

Under a rent-to-own agreement, the tenant signs a lease that stipulates the possibility — not necessarily the obligation — of buying the home at the end of the lease contract. Part of the rental payments go toward the purchase of the rental home. This is called a rental credit. At the end of the contract, which is generally one to three years in length, the tenant can use their rent credit to purchase the home. If they decide not to purchase, the tenant will forfeit the rent credit.

There are two kinds of rent-to-own agreements:

  1. Pre-occupancy (or lease-purchase)
  2. Leasing with the option to purchase

Pre-occupancy

Also called a lease-purchase, this agreement means that the tenant signed a promise to purchase and must buy the home at the end of the term. If, for whatever reason, the tenant cannot purchase the home, they could be subject to paying a penalty.

Option to purchase

The tenant signs an agreement stating that they have the option, but not the obligation, to purchase the home at the end of the rental term.

How rent-to-own works

Rental payments

Once the agreement has been confirmed, the tenant will make regular monthly payments over a predetermined period (generally one to three years). Here is where rent-to-own differs from straight rent: the rental payments are divided into two parts, with a larger proportion going to the rental fee and a smaller portion to the down payment. The split is normally 75%–25%.

Option deposit

Similar to purchasing a home straight-up, the tenant will be asked to pay an option deposit, also called an option consideration. This is a non-refundable (but negotiable) deposit which is usually 2%–5% of the home’s final asking price.

The option deposit is a separate contract that gives the tenant the right, but not the obligation, to buy the home at the end of the rental period. If the tenant does not wish to pay for the option deposit, the landlord may still allow them to rent the property, but the tenant will not have the right to purchase it at the end of their lease.

Depending on the contract, the full sum or part of the option deposit may be applied to the down payment.

Purchasing the home

Once the lease is over, if the tenant still wishes to (or is obligated to) buy the house, they will need to qualify for a regular mortgage insured by the Canadian Mortgage and Housing Corporation. If the tenant’s agreement to purchase the home is optional and they don’t like the house or have any other reason not to buy it when their rental term ends, they can walk away from the deal.

The final price of the home is determined by the terms of the rental contract. Some contracts lock in the price before the tenant moves in, while other contracts stipulate that the price will be determined at the end of the lease term according to the home’s appraised market value.

Rent-to-own example

Here’s an example of how rent-to-own works, based on a three-year contract:

Example

The tenant agrees to pay $1,200/month, with an additional $600/month applied to the down payment. The home in question is a condo with a locked-in price of $380,000.

  • The option deposit is $7,600 (2% of the sale price).
  • The remaining mortgage at the end of the rental term is $370,400 ($380,000-$7,600).
  • The monthly rent is $1,800.
  • The monthly portion applied to the down payment is $600. This comes to $21,600 over the term of the lease ($600 x 36 months).
  • The amount remaining on the mortgage is $348,800 ($370,400-$21,600).

In this example, the tenant will have paid off about 8% of the mortgage, including the option deposit ($32,200). All told, the tenant will have invested $72,400 in the property over the three years.

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Home insurance considerations

Home insurance is not compulsory, but the landlord may require you to take out tenant insurance as part of the contract terms. As a tenant, you are not responsible for the actual dwelling, but if your personal property is damaged or lost, you will have to replace it with your own money if you don’t have insurance. If you go on to become a homeowner at the end of the rental period, you will need to take out a home insurance policy.

Rent-to-own pros and cons

Pros:

  • The tenant has the right to walk away at the end of the lease agreement if they signed an option to purchase contract. They may not like the house or neighbourhood, for example.
  • Monthly payments, of which a portion goes toward the down payment, help the tenant build a solid payment history, which may help their credit rating.
  • If the tenant negotiated a locked-in price, they will benefit from cost certainty if the house rises in value due to fluctuations in the real estate market.

Cons:

  • The tenant will still need to qualify for a mortgage at the end of the lease term if they go on to purchase the property. If they signed a pre-occupancy agreement but fail to get a mortgage, they may have to pay a penalty.
  • The option deposit would be forfeit if the tenant doesn’t go on to purchase the home. This is normally 2%–5% of the price of the home.
  • The tenant could end up paying more than the home is worth. For example, if the price was not locked in at the time of signing the lease agreement, it is possible that the value of the house could rise during the contract period.

Commonly asked questions

Who Is responsible for the maintenance of a rent-to-own home?

This is determined by the agreement between the tenant and the landlord or the property management company. The contract will stipulate who is responsible for paying utilities like heating, electricity, and water. The tenant is responsible for minor repairs and touch-ups.

Can a tenant be evicted from a rent-to-own dwelling?

Tenants could be subject to eviction for a number of reasons, though which reasons are legal depend on provincial legislation. For example, the landlord may want to renovate the unit, or the tenant could default on their rent payments. In some locales, the tenant has the right of first refusal if the landlord sells their unit during the rental term. That means they have priority over other potential buyers.

Please see our articles on evictions in Quebec, Ontario and Canada for more details on evictions.

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