With the new mortgage lending rules now in place, rent to own may be a very tempting alternative to reach home ownership. Is this truly a great option?
Rent to own, definately could be an option, if it is set up correctly. Let’s look at what a rent to own agreement would need to look like to make the contract work and achieve your goals.
- Market rent must be the base price for the property. The portion you add over the market rent would be going towards the down payment. An appraisal report for the market rent should be included in the agreement.
- Only the portion over that amount can be used as down payment and should be paid with 2 separate cheques (one for market rent and ond for the added payment).
- A contract should be signed and dated at the beginning of the term when the tenant (you) moves in. If you are already renting the unit and are switching to a rent to own then a new contract should be drafted.
- A high deposit is often requested, while negotiable, it is usually around the 10K mark. This deposit should be refundable and should be stipulated in the contract. As well as the application of any lump sum payment you make should be stipulated in the original agreement as refundable.
- Purchase price and date of purchase must be set at the onset of the contract.
Looking at this list, rent to own looks like a great option. Let’s look at the pitfalls of this kind of scenario.
- You will be paying higher rent than you would normally pay for the unit. The extra portion is not refundable if you do not purchase the unit. If you can pay that amount why not simply rent and include that amount in your own bank account until you are in a position to purchase a home.
- If you cannot prove the actual amount paid towards the down payment, you might not be able to use that amount. Also, many lenders would consider this as ‘gifted equity’ and since it is not from a family member it would not qualify for the down payment. The selection of mortgage lenders/ banks would be limited.
- Should part of the contract not align with the insurers (CMHC, Genworth and Canada Guarantee) the insurers will not insure the deal and you will require a higher down payment (20%) to make the deal work.
- The deposit should be refundable – many times rent to own sellers do not want to stipulate that the deposit is refundable. Should this not be stipulated, the insurers will not accept the mortgage application. As well, it would be highly recommended if this amount was held in trust at a lawyer’s office. This would be better protection for your assets.
- Purchase price is established at the beginning of the contract. The downside is should the market stay the same or reduce in value then the higher purchase price may result in a non purchase, you pay the difference out of pocket which means you have over paid for the property or the landlord may not want to sell .
- If the mortgage rules change within the time frame of the rental, your financial situation changes, employment changes , you end up having any credit issues or your debts are too high resulting in the inability to borrow as much as the agreed price of the home, you will not be able to qualify for the purchase. You may need to look at alternative lending, thus requiring more money down and higher mortgage rates.
- The contract date is often not flexible and if you do not qualify for a mortgage at the end of the term, you will lose all the extra money you have paid for the rental unit. Also should life get in the way and you are late on the rent payment, the contract may become null and void.
Rent to own agreements are very lucrative for the seller and very seldom work out for the positive for the renter. Should the seller declare bankruptcy, you will need to be added to the list of creditors and could be paid only pennies on the dollar. You will lose your deposit money.
Other things to be considered:
- Make sure you have your own independent legal advice,
- Who is the rightful owner of the property,
- Are you actually paying the correct party,
- Look into registering the lease against the title of the property that will prevent the owner from selling the property from under you. There is a cost associated to registering a lien.
Before you enter into such an agreement it would be best to talk to a reputable mortgage broker. They will provide you with all the ins and outs of these types of financing structures.
You may be better served by looking at other options rather than signing on the dotted line;
- Start your own RRSP account for the down payment.
- Collect the tax break and invest that money in your down payment.
- Look at a flex down program or gifted down payment program.
- Work alongside The Wilson Team to get your purchase power on track.
- There are many different options that are available and would be a safer and more reliable way of purchasing a home.