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Rent-to-Own: Is It Right For You?

Updated: Apr 12, 2023

With the Bank of Canada’s recent fluctuations of interest rates, the past few years have not been kind to the real estate market. Many have found that the rising interest rates have encouraged them to remain living in their current home, prolong their home-buying decision, or consider renting.

The safety and security that renting offers tenants has encouraged many to only look once at purchasing a home. Once they view the mortgage rates, property tax, and maintenance costs, they decide to remain renters.

But renting, as great as it is for some, may not be great in the long run for others.

Those who dream of owning a home, but continue to stay within the “safe” confines of renting, now have the option to rent-to-own. It is essentially a stepping stone into homebuying!

If you are looking to dip your toes into the home-buying process as a renter, let’s explore how the rent-to-own process may be right for you.

What is Rent-to-Own?

A rent-to-own process is essentially an agreement between a landlord and their tenant, stating that the tenant will obtain ownership of the property after the rental period has ended. What makes this agreement unique, is that this process often includes the landlord setting aside each of the tenant’s rent payments during their tenancy, by which the tenant can then use to purchase the property after a set amount of time.

Each monthly payment made under this agreement is known as a “rent credit” which combines the tenant’s monthly rent and their down payment into one lump sum. Sounds easy, doesn’t it? Well… It doesn’t end there.

Although paying a rent credit each month will help the tenant to obtain ownership after their tenancy period has ended, there are additional costs that need to be factored in before the sale of the home can be final.

Tenants are still expected to pay the remainder of their down payment, beyond the rent credit, as well as become approved for a mortgage, receive property insurance, and more.

Needless to say, there are a lot of factors that go into a rent-to-own agreement, but we’re here to make it simple for you.

Lease-Purchase vs Lease-Option Agreements

As mentioned, a rent-to-own process consists of an agreement between the landlord and the tenant. However, this agreement is typically divided into two different factors: A Lease-Purchase agreement or a Lease-Option agreement.

1. Lease-Purchase Agreement

A Lease-Purchase agreement is the most common form of a rent-to-own agreement made between tenants and a landlord. Similar to what we mentioned earlier, this agreement entails the tenant receiving ownership of the home following the end of their rental period. The tenant would provide the landlord with a rent credit, which would go towards their down payment.

2. Lease-Option Agreement

Where a Lease-Purchase agreement states that the renter is to obtain ownership of the home following their rental period, a Lease-Option agreement gives the renter that option without being contractually obligated to. This is a key difference between both options, as the Lease-Option agreement does not make the renter obligated by any means to purchase the home.

They may make deposits and enter a rent credit with their landlord, but they are not contractually obligated and can withdraw their decision at any point. It is important to note that if the tenant decides to withdraw from their previous decision, the landlord is not obligated to refund their deposit.

Should I Consider a Rent-To-Own Situation?

When it comes to deciding whether you should consider a rent-to-own option, the answer is: It depends! It really boils down to personal preference, along with your financial situation. If you find that you are financially stable enough to purchase a home, you may want to consider working with a real estate agent to find a home that suits your needs.

If you are absolutely in love with your current home and want to own it, then a rent-to-own option may be best for you.

Lean on Arise Mortgage

When it comes to your home-buying process, decisions such as these can be difficult to navigate. With a mortgage brokerage team on your side, you no longer have to face these decisions alone.

Get in touch with our team today, and learn more about your home-buying options.

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