Canada is buying into the rent-to-own concept. Here's how it works

When Christian Fracchia first heard about a rent-to-own opportunity in Port Moody, B.C., four years ago, he saw a way to realize his dream of first-time home ownership, so he put his name in a lottery for 30 units.

About 10 per cent of the 358 units in the development still under construction at 50 Electronic Avenue were sold as rent-to-own, meaning the buyers pay a fixed rent for two years, which is then converted into equity.

Fracchia, a 28-year-old software developer, has an appointment a week from now to tour his new one-bedroom apartment near the SkyTrain and a seaside park. All this for $10,000 down and $1,000 per month rent, which goes toward a down payment on the $470,000 place in two years' time.

"Essentially, it's like free rent for two years. That money [I pay now] I get to keep as long as I go through with the sale," said Fracchia, who will move in with his wife in a few months.

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, Prime Minister Justin Trudeau said at a news conference in Kitchener, Ont., on Aug. 30.

"For a lot of renters, saving to buy a home is increasingly difficult. Through this new program, we'll work with housing providers to help families go from renting to owning their home," Trudeau said.

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.

Back in 2018, when the Panatch Group offered rent-to-own units in Port Moody, 500 people applied. 

Developer Kush Panatch of Richmond, B.C., said he'd never offered rent-to-own before and was shocked by the fervent interest.

He ended up only inviting Port Moody applicants in a sort of lottery, after reviewing essays — including one from Fracchia, who wanted to stay in the community he loved.

While exciting, Panatch cautions that rent-to-own is not always the perfect path to home ownership.

"We learned a lot by doing it. There were some nasty surprises, unfortunately," he said.

He discovered unforeseen costs — like the fact that his company had to carry the cost of the GST from the moment the renter moved in until they bought the unit. As well, there were complex legalities to navigate. Rising interest rates also made the program more expensive, said Panatch.

"I think some assistance from both the federal and provincial level would really go a long way toward facilitating a program like this," he added.

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.

Rachel Oliver of Clover Properties north of Toronto runs a private rent-to-own program that she says has helped 600 Ontario families "fast-track their ability to get closer to home ownership."

Oliver says that 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.

"It's basically a forced savings. We sell the property in increments," said Oliver.

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?

Oliver says that at the outset of a rent-to-own agreement, her 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.

Oliver and her husband work with investors who take on the debt burden until the renter can build up equity and become a first-time owner much faster than they could save.

Clover Properties is expanding into Alberta and Quebec given the increasing need for families to get a home before prices get too high.

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

She warns, however, that the devil is in the contractual details, which is why she says she works with the buyer and investor to ensure success and avoid investors "being greedy."

Meet the terms, or lose the down payment

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

"If they stop paying on time or paying the contract amount, it would be a breach of the contract. We'll do our best to work with individuals in this situation. Once we've exhausted all options … they have to leave the property and forfeit their down payment credits," Oliver said. "That's why we screen so strictly."

Also, unlike regular renters, rent-to-owners are often responsible for maintenance and upgrades.

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

"They are basically subsidizing developers. Hopefully, the builders will pass on savings in a legitimate way to the end user," said Oliver, who believes developers should collaborate with experienced rent-to-own providers to manage the complex agreements.

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.

Paula Higgins, chief executive of the HomeOwners Alliance in London, said building safety codes there 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, she said.

If Canada wants in on the rent-to-own game, Higgins has some advice: ensure it's the renter who benefits most.

"I would be very wary of creating a system that's developer-led — it helps them and not the renters."

Higgins says 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.

Gary Schwartz, president of the Canadian Lenders Association, said scrounging up a down payment on a first home is too high a hurdle for many people given spiking real estate prices and inflation.

"Saving for a 20 per cent down payment is becoming too great a burden for many first-time buyers, locking them into a cycle of renting," said Schwartz.

"It's exciting to see the CMHC develop programs that can accelerate innovation in the rent-to-own space."