Can’t afford that first home? Renting to own might get you started

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Long a little-known alternative path to homeownership, rent-to-own programs are about to gain new prominence in Canada

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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.

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Susan and George were preparing to purchase a new home in Woodbridge, Ont., four years ago, but faced a significant hurdle: with a previous blemish on their credit history and the home being their second purchase, they needed a 20-per-cent deposit, which they just didn’t have.

They put an offer on a house, but at the last minute their financing was declined. Instead of giving up, they turned to a rent-to-own firm, Clover Properties, which swooped in with an investor who bought the house and agreed to let them rent it until they could purchase the property outright.

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“I had wanted to go the traditional route and my husband had it as a back-up, but it ended up being the umbrella we needed,” Susan said. “It was phenomenal.”

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It ended up being the umbrella we needed

Susan

The couple, whose names have been changed to protect their privacy, bought their home in December 2021 with a 25-per-cent down payment.

Long a little-known alternative path to homeownership, rent-to-own programs are about to gain new prominence in Canada.

After the Liberals promised $1 billion toward a national rent-to-own program, Prime Minister Justin Trudeau tasked Housing Minister Ahmed Hussen in his December mandate letter with creating a fund to test, develop and scale up such projects across the country “to help make it easier for renters to get on the path to home ownership.”

Hussen recently launched a public call for ideas on what a future program should look like, but they have been around in some form in Canada since the 1970s.

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In a typical rent-to-own model, a renter commits to renting a property for a number of years before buying it for a locked-in price from the homeowner at the end of the lease. During the lease term, the soon-to-be owners pay rent plus an extra monthly sum, which goes toward building up their down payment.

“Rent-to-own is designed not just to help people who might not qualify with the banks, but it should give people the time and runway they need to become mortgage-ready,” said Rachel Oliver, who co-founded Clover Properties and co-wrote Rent to Own Essential Guide for Homebuyers: Your Key to a Fresh Start and Richer Future with her husband, Neil Oliver.

It should give people the time and runway they need to become mortgage-ready

Rachel Oliver

The programs are ideally suited for homebuyers who are just falling short of qualifying for a mortgage, Oliver said, such as those who have enough saved for a down payment, but have spotty credit history or have some student or car debt to pay down.

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“The banks are very specific in terms of what they want for a down payment,” she said. “Someone with perfect credit can get away with five per cent, but someone with imperfect credit will need to put 15 to 20 per cent down.”

Renters who go through Clover’s program need a five-per-cent down payment, and then use their three- or four-year lease term to roughly double it. The program also includes built-in provisions for improving a renter’s credit score, Oliver said.

In a slightly different approach, Vancouver-based Bosa Properties Inc.’s Bosa Equity program allows 25 per cent of a tenant’s monthly rent to build up as a credit toward a down payment on a future home purchase with the property firm. The credit is good for up to two years after the lease ends.

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Going through a rent-to-own program can prevent Canadians who come up a little short on a down payment from watching housing prices accelerate much faster than their income and savings, Oliver said.

It can also be less expensive than choosing to go with a private lender, she said, which can come with legal and mortgage fees and higher interest rates than an “A lender.”

But not all programs are created equal, said Romana King, a personal finance and real estate expert and the author of House Poor No More. She encourages homebuyers to do their due diligence to ensure the plans include appropriate legal safety checks, such as keeping the homebuyer’s growing down payment in a trust account.

You can’t just take the money out whenever you feel like it and use it for whatever you feel like

Romana King

“There are certain rules that people with trust accounts will follow,” she said. “You can’t just take the money out whenever you feel like it and use it for whatever you feel like … (You) want to make sure (your) money is safe.”

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Some plans also involve upfront or monthly fees for participating, King said. Furthermore, homebuyers should know what happens to their deposit money if they fail to purchase the property at the end of the lease term, or choose to walk away during the term.

Oliver at Clover said her company has a 90-per-cent success rate, and will extend the lease for life circumstances such as divorce or job challenges if the renters are otherwise meeting their agreement terms.

“Life happens, circumstances happen, COVID happened and it disrupted people’s plans in repairing their credit,” she said. “We totally get that.”

Clover has never evicted a tenant, and has only involved the Landlord and Tenant Board 10 times out of its roughly 600 deals in cases of late monthly payments, Oliver said. The firm always opts for negotiation to give renters time to get caught up.

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If renters choose not to continue the process, usually due to a separation or divorce, she said the firm puts the house up for sale. Clover can recover up to 100 per cent of their deposit, depending on how much the property sells for and the costs associated with selling.

Oliver said she’s happy to see the federal government pursuing a national strategy, but worries it will be similar in execution to other first-time homebuyer programs the government has introduced, which have “great intentions,” but have only been available to Canadians with perfect credit scores.

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She also hopes the federal program will allow homebuyers the experience of picking out the home of their dreams, rather than choosing from housing stock specifically designated for rent-to-own buyers.

“I don’t feel these people deserve to be stigmatized,” Oliver said. “Going house-hunting … is an important, emotional experience of getting into homeownership.”

Hussen’s press secretary Arevig Afarian said in an email that the program will be “designed to support renters achieve their dream of homeownership, which has become out of reach for far too many Canadians.”

The ministry will work with municipalities, provinces and territories, Indigenous governments, and the private and non-profit housing sectors among other stakeholders when developing the program, she added.

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