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Canada is buying into the rent-to-own concept. Here's how it works
September 14, 2022 @ 2:24 PM by: Angela Robinson

Rent-to-own is a unique path to home ownership that delays one of the biggest hurdles for new homebuyers — the hefty down payment.

Advocates say this model of home financing allows people with limited or damaged credit who can't qualify for a traditional mortgage to work toward ownership.


But critics caution that rent-to-own is untested and has some pitfalls and risks — such as maintenance costs or the potential to lose the down payment, in some instances, if a renter fails to meet the terms of the deal.


Canada is funding more projects like this by creating a rent-to-own housing program as part of $2 billion in spending to double home-building in the next 10 years. The funding, earmarked in previous budgets, is aimed at creating 17,000 new homes across the country, including more rapid housing for the homeless or those at risk of becoming homeless, along with affordable and market-rate housing projects.


$200M rent-to-own fund

Of that $2 billion, $200 million is earmarked for a new rent-to-own program. This fund, managed by the Canada Mortgage and Housing Corp. (CMHC), will encourage developers and builders to create more opportunities for first-time homebuyers overwhelmed by down payment requirements.


Applications to the five-year Affordable Housing Innovation Fund and its new rent-to-own stream opened Aug. 30 to municipalities, developers, builders, community housing organizations, non-profits and Indigenous organizations.


How does it work?

The terms of a rent-to-own deal vary. In general, it's an agreement between renters and property owners or investors to buy a home at a set price at a future deadline. The agreement is made up of a lease and an option to purchase.

The idea is to hold the property for the would-be buyer until they can save up what's needed to qualify for a conventional mortgage with a lending institution.


The renter generally pays a lump-sum down payment — her company usually requires $20,000 — and then a monthly rent that is calculated on what is needed to get them to 10 per cent of the purchase price of the property by the end of their term. The monthly rent is also calculated on the cost of carrying the property at today's interest rate.

During the period of rental, the tenant is often also responsible for paying for maintenance and upgrades to the home or condo unit.


Why rent to own?

At the outset of a rent-to-own agreement, clients can lock in the purchase price of a home, for example, at $600,000 with plans to purchase in five years. If that property value rises to $650,000, the renter gets to keep the additional value of the home they contracted to buy.

In the meantime, an investor — or, in other cases, a developer — holds the mortgage. Rental prices for rent-to-own agreements can vary, but are generally in line with market value rents at this time.


Rent-to-own is best suited for renters struggling to get a mortgage approval due to low income or damaged credit.


Meet the terms, or lose the down payment

Rent-to-owners need to be committed. During the pandemic, some lost down payments because family breakups or other hardships meant clients couldn't honour their contracts and were forced to walk away.


If clients stop paying on time or paying the contract amount, it would be a breach of the contract. Once all options are exhausted to remediate the situation, client’s would have to leave the property and forfeit their down payment credits.Also, unlike regular renters, rent-to-owners are often responsible for maintenance and upgrades.


While giving the government credit for exploring an unconventional homebuying tool, unfortunately the new federal fund focuses on development projects and does not allow rent-to-owners to shop on the open market for resale homes.


Novel path, not well tested

According to housing advocates, rent-to-own programs have been operating in pockets of the U.K., with some success.

But as is the case in big Canadian cities, properties in the U.K. are so expensive that it's proven difficult to bridge the gap between low wages and home ownership, and there has not been huge uptake.


Building safety codes in London are weak, and there were some issues with rent-to-own funding being tied to new developments. Some of these units built for renters were of low quality, as developers cut costs but still collected subsidies.

It's important that quality, affordable housing gets built, and not just high-end properties that attract investors and in the end are resold for profit and ultimately shut out local families.


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Full Article: https://www.cbc.ca/news/canada/rent-to-own-housing-affordability-mortgage-developer-home-ownership-canada-1.6570642


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