Consumers are pretty familiar with the rent-to-own concept.
The strategy offers a way for people to rent or lease things that they can't afford to buy outright.
The idea of giving people the use of something today without having to actually buy it first is the same concept behind lease-to-own (LTO) homes.
A Canadian lease-to-own home offers some distinct advantages that make it a wise strategy for someone who is unable to qualify for a mortgage today.
We describe five of these advantages below.
Saving a Down Payment The goal of a lease-to-own home is to give a qualified tenant the tools to buy a home sooner.
A tenant leases a home they want to eventually own for a specific period of time in order to do two things - build a down payment and fix their credit.
In Canada a potential home buyer currently needs a down payment of at least 5% plus closing costs in order to qualify for a mortgage and CMHC (Canadian Mortgage and Housing Corporation) insurance.
The first advantage of a lease-to-own home is that it acts like a forced savings plan because a fixed amount of the lease payment is set aside each month.
A typical Canadian LTO helps a tenant save enough money by the end of the lease term to qualify for a CMHC insured mortgage.
Repairing Personal Credit The other half of the lease-to-own picture involves helping a tenant repair their credit.
Sometimes a tenant is able to do this by simply making their monthly lease payments on time.
Other times they may need to work closely with a credit counsellor to rebuild their credit score or reduce their existing debts throughout the LTO term.
The combination of a good credit score, low debts, and a reasonable down payment will help the tenant in getting the banks to say yes when they apply for a mortgage.
They will have also gained an education in financial management while making themselves more attractive to lenders in the future.
Fixed Lease Payments The third advantage of a lease-to-own home is that monthly lease payments are fixed for the full term of the lease.
A normal rental agreement in Ontario allows the landlord to increase rents by a certain amount once every 12 months.
This isn't done with a lease-to-own agreement because increasing the monthly payments by any amount could affect its affordability for the tenant.
A fixed monthly lease payment provides the tenant with cost certainty and allows them to budget knowing that their basic housing payments will not increase.
Guaranteed Purchase Price In addition to a fixed monthly lease payment a lease-to-own also fixes the future purchase price of the home.
This is done with the help of an accredited Ontario mortgage professional when they approve a tenant for a LTO home, as well a licensed realtor once the tenant finds the house they want to eventually buy.
Before deciding what the final purchase price will be, the tenant's current household income, outstanding debts, what they can reasonably afford to buy, and historical appreciation in the chosen neighborhood have already been considered.
Agreeing to the price in advance gives a tenant the peace of mind that their deposit will be enough to buy the home regardless of what its actual value is.
Build Instant Equity Once a tenant is approved for a LTO home they are required to make a non-refundable security deposit - currently 2-3% of the approved purchase price.
This deposit is eventually counted towards the final down payment giving the tenant equity in the home from the day they make their deposit.
A tenant isn't limited to the equity created by their down payment though.
Most home owners will usually make some type of upgrade to their home, whether it is a deck in the backyard or new cabinets in the kitchen.
The same is often true in a lease-to-own because a tenant doesn't have to wait until they're able to buy the home to start making improvements to it.
With the owner's approval they can make upgrades that will usually increase the value of the home and create additional equity for themselves when they buy the house.
A tenant that's unable to qualify for a mortgage today can use a lease-to-own to buy a home in as little as 24 or 36 months.
This strategy helps tenants save a down payment and repair their credit.
Fixed lease payments and a guaranteed purchase price provide them with cost certainty.
The fifth and perhaps the most appealing advantage for tenants is the ability to increase the value of their home before actually owning it and possibly reducing their CMHC insurance premium in the process.
So it is possible to have your cake and eat it too!