As a mortgage broker Brampton and mortgage broker Mississauga we have clients asking us more and more about rent to own programs when they are set on owning a home but are not in the position to do so in the present
In a nutshell, “Rent to Own” is a program where people are paying monthly rent to eventually own the home. It is designed for individuals who might not otherwise qualify to purchase a home for various reasons (Credit, Down payment, Employment, etc.). The obvious benefit of this program is that part of your rent will help grow your down payment and you may eventually own your home.
With that said, for the purpose of this blog, I will speak specifically to the dark side of this program that is often camouflaged by the obvious benefits. I would like to start by saying that the following is a vague example and is just meant to illustrate the point that I am trying to make – “Rent to Own” programs are dangerous to the consumer and takes advantage of individual circumstances by providing an alternative solution to owning a home.
Most rent to own programs have the following structure:
- Term – How long before you can own your home
- Down payment – usually 5% of the purchase price
- Future sale price – The price at which the Investor agrees to sell you the home
- Rent – Actual rent + deposit installments
Now say you are currently renting a home at $1500/m and are tired of throwing your money away. You have 5% for a down payment towards the purchase of your home but you need to grow this down payment and your credit needs some work because you don’t qualify to make the purchase at this point in time. You then decide to explore other options and to your surprise you come across an investor who is willing to help you by way of “rent to own”. You agree to a $2000 payment on a 5 year term and provide the investor with the 5% of the future value of your home.
In this example, assuming that the actual rent portion remains at approx. $1500/m then we would assume that the deposit portion would be $500/m. Once the term comes to an end, this would amount to $30,000 that you have accumulated + the 5% you initially deposited. If all goes well, you have a sufficient down payment; your credit has improved and you are now a proud owner of your home.
But did you really need the investor? Could you not have put aside $500 a month yourself into a savings account and watched it grow similarly?…Of course you could have!
So what’s the difference? The main difference is the risk and costs involved by going through this program. What if at the end of the 5 years you still didn’t qualify to purchase your home because of your credit other factors? What happens to your 5% and subsequent deposits? That’s right; in most cases you forfeit your savings because technically it’s considered rent money and if you cannot purchase the home as agreed at the beginning of the program that you have breached the contract. In addition, since there are no guarantees that the bank will give a mortgage, it’s like you are jumping in head first, hoping you land in water that you couldn’t even see when you jumped in the first place.
Even if all goes well, this program is camouflaged to benefit the tenant when in fact the true potential of benefit is to the landlord/investor. Keep in mind as you make your monthly rent payments, you are reducing the principle on the mortgage payments that the landlord has to make on his property (your future property). At the same time, there is a future sale price that has been established, which is usually 3-5% compounded annually over the next 5 years. So for example, if the home you are purchasing today is worth $250,000, it would be sold to you at $304, 163 (based on a 4% appreciation per year). This means that the investor stands to gain significantly by offering this program, not to mention that if you are unable to secure financing to purchase the home in the future, then based on my example above, the investor gets a bonus of $30,000. The investor can now list the home for sale, or start the program again with someone else who thinks they need to be in a program to own their home.
Please keep in mind that this is a very vague example and it gets right into the dark side of the program. I personally think the risk is not worth taking and anything that investor can provide to you can be done without their help with a little bit of discipline. You can probably also see that the rent to own program is more financially demanding than just renting a home because of the extra “deposit payments”.
Sometimes the best thing to do is to understand your current situation and circumstances and focus on those items that are preventing you from owning a home. If credit is the issue, then it may be more cost effective to address your debt rather than building a larger down payment. Whatever you do, make sure you do your research and ask all the right questions. Never get into something that is not to your benefit and try to take emotion out of the equation.
At Canadian mortgage services we strive to be your source of honest information and opinions for mortgage broker Brampton and mortgage broker Mississauga. If you have any questions, would like to share your thoughts or would like to learn more, please give us a call at 905.455.5005.