Home prices are going up with seemingly no end in sight, and many Canadians have found themselves priced out of the market. Buying a home outright is almost impossible, and saving up for a down payment can be incredibly difficult.
Fortunately, there’s another option – one that works for Albertans who don’t have enough cash for a large down payment and for those who haven’t built up enough credit to get a mortgage. We’re talking, of course, about rent-to-own homes.
What are rent-to-own homes?
The premise of all rent-to-own sales, including rent-to-own homes, is pretty straightforward: Instead of buying something outright, you rent it for a certain period of time, and the rent you pay goes toward the purchase price of the item.
Rent-to-own homes work differently than most rent-to-own contracts, but the basic premise is the same. Instead of paying for the whole home, you pay down the costs with monthly rent payments. Then you’re given the option to purchase the home outright once the contract period has expired.
If you can’t pay cash for a house in Edmonton right now, but you see a house you’re interested in, and you think you’ll be able to purchase it in a few years, rent-to-own may be a great option for you.
This article details how rent-to-own homes work in Edmonton (and Alberta in general) – if you’re in a different jurisdiction, some points in this article might not apply. Nonetheless, the general information contained here should help you better understand rent-to-own homes. It will also help you determine if rent-to-own is right for you.
What do rent-to-own contracts look like?
Buying a home is complex at the best of times, and rent-to-own contracts add their own unique complexities to the mix. We’re going to break down the clauses contained in most rent-to-own home contracts:
The length of the contract
This section of the contract describes how long the contract will be in force. The parties to the contract will have different obligations over the course of the contract (which we’ll explain below) and obligations once the contract period is over.
Typically, rent-to-own home contracts last from 1 to 3 years. That means you’re not going to be able to buy your dream home in Strathcona after renting it for 25 years. Rent-to-own contracts are relatively short, and you’ll need to shore up your finances and credit over that period of time.
The agreed-upon purchase price/lease option
Rent-to-own contracts include an agreed-upon purchase price. Once the contract period is over, the renter has the option to purchase the home for the agreed-upon price. In most contracts, they are not legally required to purchase the home; in such contracts, the agreed purchase price may be referred to as a “lease option”.
The option fee/move-in fee
The homeowner is taking a risk by agreeing to allow the renter to purchase the home at a given price; housing prices could go up over time, after all. To decrease this risk, the contract will include an option fee, sometimes called a move-in fee.
This fee varies – it may be as much as the minimum down payment for the home. Fortunately, most rent-to-own contracts allow the renter to put the entire option fee toward the down payment of the house at the end of the contract. There’s a catch, though – if a renter declines to purchase the house, the option fee is lost.
The monthly rent/lease
The amount you’ll pay in rent each month varies from place to place, but it will typically be, at a minimum, enough to satisfy the owner’s mortgage payments. Generally, the monthly rent of a rent-to-own home will reflect the market. In other words, if the average monthly rent for a 700 sq foot bungalow in Grovenor is $1800, you can expect to pay ~$1800 in rent each month, even if the mortgage payments for the home are only $1500.
Your rent payments (sometimes called lease payments) aren’t the only monthly payments you’ll be making toward your rent-to-own home, though. Next, we’ll take a look at rent credits.
Rent credits are payments above and beyond fair market rental rates that you’ll make each month. These credits are either refunded to you at the time of purchase or are automatically included in your down payment. They’ll be held by the homeowner in escrow until the contract is completed.
For rent-to-own contracts in which the option fee is lower than the minimum down payment, rent credits are used to shore up the option fee until it reaches the minimum down payment (as defined by the CMHC for mortgage loan insurance).
At the time of writing, the CMHC has a minimum down payment of 5% on mortgages of $500,000 or less. The average price for a single-family detached home in Edmonton is also ~$500,000.
Imagine the agreed purchase price of your contract is $500,000. You paid an option fee of 2.5% of the purchase price ($12,500). The length of the contract is 3 years.
To make up the other 2.5% of the minimum down payment, you’ll need to accrue another $12,500 over 3 years. This cash will be accrued through rent credits, which means your rent credit each month will be at a minimum $12,500/36 (one payment per month for 3 years is 36). This means you’ll have a monthly rent credit payment of at least $326.22.
Rent credits are added to your monthly rent payments – that means if you’re paying $1800 in rent, then $326.22 in rent credits, your monthly payments will be $2126.22.
Maintenance, utilities, and other agreements
Things like who is responsible for maintenance and who pays for utilities are included in the contract. These terms are quite variable – the renter may be responsible for everything or for almost nothing.
The advantages and disadvantages of rent-to-own homes
There are several pros and cons to rent-to-own homes. Here are a few:
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Who should consider a rent-to-own home in Edmonton?
You should consider a rent-to-own home if you know you want to purchase a particular home, but you need to build up credit and savings for a larger down payment before you purchase it. You might also consider rent-to-own if you think home prices will go up, and you can secure an agreed purchase price that you can’t pay for now but will be able to pay for later.
We hope this article has helped you to determine if rent-to-own is right for you. Many Albertans have found that rent-to-own gives them the flexibility and time they need to purchase a home, all while securing great purchase prices. If you’re interested in a rent-to-own contract, give us a call!