Prime Minister Justin Trudeau plugged a suite of spending plans Tuesday aimed at improving housing affordability, including $200 million in funding for rent-to-own models in Canada.
But what is rent-to-own, and is it a suitable path to home ownership for Canadians struggling to enter the housing market?
Advocates say the model offers promise to Canadians with damaged credit who are unable to secure mortgages from traditional lenders, but others caution it’s not a “magic solution” to turn today’s renters into tomorrow’s owners.
Global News spoke to experts to break down what rent-to-own means and whether government spending on the model will promote housing affordability.
What is rent-to-own?
The rent-to-own model varies depending on who’s setting the terms, but it generally sees renters enter into agreements with their landlords or an investor to purchase their current home at a set price at a future time, usually up to five years from the contract date.
That purchase agreement can be a firm commitment or an option at the end of the lease, but it comes with a set price on the home — offering predictability to both the renter and the owner.
Renters pay an up-front fee at this point, representing a portion of the eventual down payment on the home. The rest of the down payment is usually accumulated through additional savings paid regularly on top of the monthly rent.
During the time that a tenant is renting, they’re responsible for maintenance and upgrades as though they own the unit, but that gives them the opportunity to paint walls or even change countertops and other home fixtures as they like.
Why rent-to-own?
Rachel Oliver and her husband, Neil, have been in the rent-to-own game for 13 years through their family-owned company Clover Properties. Over that time, she says they’ve helped more than 700 Ontario families get “mortgage ready” to buy their homes through rent-to-own.
Oliver says she and her husband, as well as the investors that they work with, were driven to the rent-to-own model by wanting to invest with “purpose.”
“We didn’t want just to be another landlord with just regular tenants. We really wanted to help homebuyers overcome their barriers to getting into a home of their own,” she says.
Rent-to-own is best suited for renters who struggle with getting approved for a mortgage via traditional channels, Oliver explains.
This could be a household that has damaged credit, someone who is self-employed or a family that has been through illness or another hardship that left them in a financially difficult situation.
Helping these families through rent-to-own gets them into a stable home that they can start immediately building equity in before their name is even on the title, Oliver says.
She gives the example of a household locking in the purchase price of a home at $600,000 with plans to purchase in five years — assuming the market continues to grow over that time, the value of the property could rise to $650,000, but the renter will get a more valuable home plus any improvements they’ve made at the lower price.
While that might seem like a bad deal for the landlord, Oliver says rent-to-own is appropriate for investors who don’t necessarily want to manage tenant turnover or deal with raucous renters.
“There’s a whole contingent of investors that don’t have the stomach for that,” she says.
“They have a very predictable, very stable, very dialed-in rate of return with cash flow. And they have the satisfaction of helping a family achieve their ownership goals. So it’s a completely different appetite.”
Some low-income earners might not benefit from rent-to-own
Trudeau’s announcement on Tuesday acknowledged that concerns about eroding housing affordability are coming as the rental market is booming.
Rising rents are eating away at many Canadians’ monthly incomes and affecting their ability to save for the down payment typically required to buy a home.
In this market, finding extra money on top of rent to go towards eventually buying a property can be prohibitive, says Jason Heath, managing director of Objective Financial Partners.
He tells Global News that the “incremental” payments typically associated with these models are the important “caveat” to anyone dreaming about going from renter to owner.
“This isn’t just a magic solution for renters where they become homeowners,” Heath says.
“If people are having a hard time paying their rent month-to-month, the likelihood of those people being able to come up with extra in order to enter into a rent-to-own arrangement is unlikely.”
For those with extra cash to put aside, the incremental payments that would go towards eventually buying the property could meanwhile go towards a tax-free savings account or other investments to save for a traditional down payment, he adds. This gives aspiring homeowners more “flexibility” on the timeframe and exact property they want to buy, Heath says.
But he notes that for a renter who is sure they want to eventually own the exact property they’re living in sometime down the road, the rent-to-own model could be appropriate.
Oliver calls the program’s additional payments a “forced savings” plan that helps clients to repair their credit and get ready for mortgage approval.
She says Clover Properties is hands-on with renters in its programs and does “check-ins” every 90 days or so to make sure they’re on track to meet their savings goals.
Compared with similar programs that leave tenants to their own devices, Oliver says Clover finds supporting their clients through the savings process ends up in a more successful “exit” from the rent-to-own funnel.
“Nobody wants to figure out how to fix their credit. That’s not sexy. Nobody wants to meticulously save up an extra 500 bucks because it’s fun. That’s hard to do,” she says.
“But when you’re held accountable, when you have a team that’s structuring it for you, people were responsive and they were capable. We realized that’s our secret sauce to success.”
Should homeownership be the end goal?
Hanif Bayat, founder and CEO of real estate guide WOWA.ca, told Global News in an email that Ottawa’s rent-to-own program will probably have a “minimal impact” on housing affordability in Canada.
He says that building incentives will most likely be used by developers who already had plans to build units and therefore won’t give a net boost in housing supply needed to make homes more affordable across the country.
Moshe Lander, economist with Concordia University, agrees that federal policies must incentivize municipal approvals for new builds to make a dent on housing affordability in Canada.
Even if rent-to-own helps more families buy a home, federal government policies promoting the model contribute to a “stigma” in Canadian society against renters, Lander says.
Growing up, Canadian kids are bombarded with messaging that saving for a home is a goal to strive toward, he argues.
“The idea was that home ownership was like the greatest goal you can aspire to in Canadian society,” he says. “We’ve created the stigma that being a renter is somehow a second-class citizen.”
Federal government policies that position renting as a stepping stone to homeownership double down on that messaging, Lander says.
“The whole idea is that renting is not the end in itself. It’s a means to an end.”
Oliver, too, says Clover Properties has had to combat “stigma.” There’s little education about rent-to-own in Canada, she says, and has heard from clients that there’s been pushback about the model from mortgage and real estate agents.
Clover has been seeing a growing interest in these savings plans, though, as buyers feel increasingly lost in Canada’s housing market.
“I think people are like saying, ‘Screw the stigma. I need any solution that’s going to be helpful for me to get into ownership. So I’ll explore every avenue.’”
Heath says that whichever path a household is pursuing, whether it’s homeownership, rent-to-own or renting for the long term, “do the math” and think about the longer term goals associated with housing.
Many young Canadians renting condos now might be excited by the idea of owning their apartment, but don’t consider the long-term commitment of buying a smaller property today and having to change cities for their career or accommodate a growing family.
“I think you need to crunch the numbers and look at the math in your personal circumstances rather than getting caught up in any sort of proposal, whether it’s a government incentive or an investment opportunity or anything like that,” he says.