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How Does Rent to Own Work in BC?

How Does Rent to Own Work in BC?
Rent to Own contract

Plenty of people in British Columbia have a dream of owning their own home. Renting is not the most comfortable or stable of situations — and then there’s the high rents to consider. In Victoria BC, the average rent for a one-bedroom was $2,053 per month in September 2023, and it is even worse in Vancouver, where a one-bedroom, on average, goes for $2,800. 

Stack these numbers up against average incomes: around $51,000 in Victoria, and $60,870 in Vancouver and you might be thinking about trying to find a way to put all the money you’re sinking into rent, into buying an actual home where you can be safe and secure, raise a family … or even just paint the walls a colour you like.

But if you’re an average person in British Columbia, making an average or even above average income, there’s little chance you’ll qualify for a mortgage. House prices are through the roof — on average $1,327,700 in Victoria BC for a single family home in August 2023, and $2,018,500 in Vancouver. The 20% down payment requirement alone, puts home ownership out of reach for a substantial number of British Columbians. 

How about the rent to own option? Wouldn’t this eliminate the need for a down payment and make owning a home more do-able? How does rent to own work in BC? Read on to find out.

What is a Rent to Own Agreement?

A rent to own agreement is exactly what it says. Tenants pay rent with the option to buy the home at the end of the agreement. A portion of that rent, called a rent credit, goes towards a down payment. The property owner or investor holds the mortgage for the duration of the agreement — usually between one and five years — and cannot sell the house to anybody else during that time.

How Does Rent to Own Work?

The rent to own agreement involves two contracts: the rental contract as well as the rent-to-own contract. There are two main types of rent to own contracts, either a lease-option agreement or a lease-purchase agreement.

Lease-option: This is also called an option to purchase agreement. In this agreement the tenant is given the option to buy the house at the end of the lease period, but is not obligated to do so. If you decide to not purchase the home, you won’t suffer any penalties. Usually the tenant pays an option deposit when the agreement is signed and then pays the monthly rent payments. The option deposit is not refundable if you decide to not purchase the home.

Lease-purchase: In this type of agreement, the tenant is obligated to purchase the house at the end of the leasing period. The tenant pays a small down payment at the beginning (usually around 1-5% of the purchase cost), as well as the monthly rent payments. If the tenant backs out, he will lose his down payment, rent credit and will possibly also need to pay a penalty.

Benefits of Rent to Own

A rent to own agreement can benefit both parties in some situations. For renters, it is particularly helpful for first-time buyers, immigrants or people without a credit history or with a poorer credit score. Rent-to-own agreements become particularly interesting to sellers when the housing market is depressed, but there are other reasons they might opt for this as well.

Benefits for the Renter

Rent to own programs make it easier for those who can’t quite meet the down payment requirement to qualify for a mortgage.

  • The purchase price is locked into the agreement. This can go both ways, but generally the price of houses goes up, not down.
  • A smaller down payment with the rest covered by the rent credit.
  • Gives tenants with a poor credit rating time to improve it so they qualify for a bank mortgage at the end of the lease period.
  • The tenant gets to live in a space they can call their own.

Benefits for the Landlord

You may be wondering if there’s a catch to all of this. Why would any landlord agree to a rent to own program? What’s in it for them? Here’s a few benefits for landlords:

  • With the option to buy the home they are living in, tenants have a great incentive to take care of the property and make sure they pay rent on time.
  • Avoids the costs of real estate agents when selling.
  • If the tenant still doesn’t qualify for a mortgage at the end of the leasing period, the landlord has gained in home equity and possibly can even retain the down payment.
  • In a depressed housing market, it may be easier to sell one’s property.

Risks of Rent to Own

The benefits sound great and yet rent to own contracts are not very common. There are, of course, some disadvantages to this arrangement, including:

Risks for the Renter

  • More expensive than renting: The monthly payments will be higher than they would be for renting or mortgage payments, since they contribute to the down payment of the purchase. As well, the renter is usually required to pay for the maintenance of the property, adding to costs.
  • There is the risk of buyer remorse if the cost of housing has decreased by the end of the lease arrangement.
  • It is hard to find a seller who will commit to a rent to own agreement.
  • The renter will still need to qualify for a mortgage at the end of the lease agreement and many lenders will not mortgage a rent to own agreement.
  • If you decide to not purchase the home there may be penalties.

Risks for the Landlord

  • There is a risk of seller remorse if the market goes higher than expected.
  • The unilateral nature of the contract favours the buyer: the seller is bound by the contract to sell the home to the renter at the end of the contract, whereas the tenant is not bound to purchase the home.

How to find Rent to Own Properties

Rent to own agreements haven’t been all that common in Canada. However, in 2022, the Government of Canada brought in the Rent to Own program as part of their Affordable Housing Innovation Fund. The rent to own program, managed by the Canada Mortgage and Housing Corp. (CMHC), is meant to incentivize housing providers, developers and investors to provide more rent-to-own properties. 

Presumably, the number of rent to own options will increase as housing providers take advantage of this funding. There are also a number of rent to own companies that already serve the local markets of Victoria and Vancouver.

Of course you can always present a seller with the option of a rent to own arrangement. If a seller takes you up on this, be sure to look for a lawyer who has experience in rent to own contracts. They can be complicated and you’ll want to make sure you aren’t taken advantage of.

Auxilium Mortgage Can Help

Auxilium Mortgage can assist by walking through your options with you. When researching the rent to own option, a good place to start is with our rent vs buy calculator to give you a sense of the overall costs involved in each.

In your rent to own research, it is best to keep the end point in mind — which means educating yourself on lender requirements. Otherwise, you could get through the lease period, only to find that you still don’t qualify for a mortgage.

Give Auxilium a call and we’ll discuss your options. 

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4 Comments

  1. As the seller
    When is the capital gains tax calculation?
    The day of closing or spread out over the contract?

    Doug

    1. Hi Doug, when it comes to tax advice on matters such as “capital gains” it’s best you consult a professional accountant or CRA for clarification as it’s outside of scope of expertise.

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