Nowadays, with the state of the economy and the high price of housing (both to own and to rent), many people are looking for affordable housing options.
People searching for affordable housing are coming across the concept of Rent to Own and they think - maybe this is the solution to my affordable housing problem!
If you're reading this thinking that you've finally found the affordable housing that you've been looking for through renting to own - I'm gonna have to be the one to burst your bubble and tell you flat out - Renting to Own is not an affordable housing option.
Anyone who tells you otherwise is not being truthful. And in fact - they may be setting you up to lose a lot of money. So be cautious if you talk to someone who claims that Renting to Own is affordable.
Let Me Explain - Understanding Renting to Own
Rent to Own is an alternative strategy to get into homeownership. It can be an option for people who are unable to qualify for a mortgage - typically due to reasons like insufficient down payment, bruised credit (or lack of credit history), debt, or self-employment.
That said - qualified candidates must have a minimum income (typically $100,000 annual income in Ontario) in order to be accepted, and most importantly, successful, in the program.
The purpose of a Rent to Own Program is to provide people with the time they need to repair the issues that are preventing them from getting a mortgage.
For example:
accumulate the required down payment
repair or establish credit
pay down debt
restructure self-employment income and expenses
Once these issues are worked through, the Rent to Own client will then be able to go to a traditional lender like a bank, to secure a mortgage and take over ownership of the home.
Now that you understand what Rent to Own is, let's talk affordable housing.
What IS affordable housing?
The Canadian Mortgage and Housing Corporation (CMHC) defines affordable housing as housing that costs less than 30% of a household's before-tax income. Therefore, affordable housing is a metric related to the household's income.
So what does this look like?
Let's look at some examples:
Household Income (total) | 30% of household income (annual) | 30% of household income (monthly) |
$50,000 | $15,000 | $1,250 |
$60,000 | $18,000 | $1,500 |
$75,000 | $22,500 | $1,875 |
$100,000 | $30,000 | $2,500 |
This table shows that affordable housing for a household with a $50,000 annual income would cost $1,250 monthly. Following the examples, a household with a $60,000 income would need housing that costs $1,500/month to be considered affordable by the CMHC definition and so on and so forth.
Great - now we understand what affordable housing looks like in numbers.
Now let's look at the costs associated to Renting to Own.
Cost to Rent to Own
There are 2 payments that a Rent to Own client is responsible for each month while they're in the program.
First, they're responsible for paying Rent. The way rent is calculated varies by company but typically it will be at least equivalent to market rent for a comparable home.
The second payment is something called an Option Payment.
Remember I mentioned that Renting to Own is an option for people who need time to save for their down payment?
Well, the way that a Rent to Own program helps people save for their down payment is to have them pay this Option Payment every month in addition to their monthly rent payment. The Option Payment is paid by the Rent to Own client to the Rent to Own company and is credited back to the Rent to Own client when they take over ownership of the home.
Numbers show the story best, so again, let's look at some numbers to see the breakdown of housing expenses while in a Rent to Own program - and relate it back to income and the affordable housing metric as defined by CMHC.
Household Income (total) | 30% of household income (monthly) | 2 bed rent ($2,774/month*) | 3 bed rent ($3,079/month*) |
$50,000 | $1,250 | 2.22 x affordable housing metric | 2.46 x affordable housing metric |
$60,000 | $1,500 | 1.85 x affordable housing metric | 2.05x affordable housing metric |
$75,000 | $1,875 | 1.48 x affordable housing metric | 1.64 x affordable housing metric |
$100,000 | $2,500 | 1.11 x affordable housing metric | 1.23 x affordable housing metric |
*2 bed and 3 bed rent rates as of November 2023 in Ontario reported by Urbanation Inc. and Rentals.ca
The numbers speak for themselves - but let's talk about it.
First - I recognize and acknowledge that rent prices are out of control. An average of $2,774/month for a 2 bedroom rental is crazy. But it is our current reality.
That said, rent alone for a 2 bedroom home cost 2.22x more than affordable housing with a $50,000 income. Heck, 2 bedroom rent exceeds affordable housing metric by 1.11x even with a $100,000 income.
In every scenario in the table above, the rent payment alone exceeds the affordable housing metric. And this doesn't even include the option payment portion of the monthly payment.
If we assumed a $400/month option payment, which is considered average, this bumps up the cost of renting to own to as high as 2.78x the affordable housing metric for a 3 bedroom home with a $50K household income, and as low as 1.27x for a 2 bedroom home with a $100K household income.
No matter which way you slice it, Rent to Own is not considered affordable housing.
But Why Don't Rent to Own Companies Lower the Cost?
There are a few reasons why Rent to Own Companies don't, or should I say, can't, just lower the cost.
And truly, it is for the Rent to Own client's protection.
First - let's consider the Option Payment portion of your monthly payment.
The whole purpose of the Option Payment is for you, the rent to own client, to accumulate enough down payment to be able to secure a mortgage at the end of the Program. If the Option Payment amount was lowered, your ability to get a mortgage would be put at risk! This is definitely not an area where it would make sense to simply lower the cost and throw away all that time, money and effort.
Second - the rent amount. You might be asking, if I agree that rent costs are out of control, then why not just charge less rent?
Here's the thing - most people that come into a Rent to Own program in Canada will be getting an insured mortgage when they take over ownership. An insured mortgage is one where you put down less than a 20% down payment.
Mortgage insurance companies have specific requirements for individuals when they are exiting a Rent to Own program.
For example, Sagen, one of three mortgage insurance companies in Canada, specifies:
In other words, if a Rent to Own company charged less than fair market rent, the amount that you thought you were putting away toward your Option Payment and ultimately toward your down payment would be less than expected.
And this not only puts you at risk of being able to prove sufficient down payment funds to the bank, but it ultimately puts at risk, your ability to successfully exit the Rent to Own Program and take over ownership.
With all of this said, you might be asking...
If Rent to Own isn't Affordable, then Who is it Good for?
The short answer is, Rent to Own is good for high income earners that have some fixable issues that are preventing them from getting a mortgage today. But that with some time and a concrete plan, they will be able to repair their issues and qualify for a mortgage.
Some specific examples of people who might be good rent to own candidates are:
A couple who one or both went through a prior divorce that impacted their credit
A newly self-employed person who needs a longer track record to prove their business's success
New Canadians who have yet to establish credit in Canada
An individual or couple who suffered an illness, or had an illness in the family that resulted in debt
A young professional who hasn't had the time to save sufficient down payment
These are just a few examples of people who might be good candidates to rent to own. In all of the above cases, a minimum income of at least $100,000 is typically required in Ontario and some down payment is needed up front (at least 4% of the purchase price of the home).
Final Thoughts
In a market where cost of living and specifically housing expenses are sky high, the search for affordable housing has led many to consider Rent to Own as a potential solution. If you have thought that you may have finally found affordable housing through this method, it's important to face the reality: Renting to Own is not an affordable housing option.
While it may not be a solution for everyone, Rent to Own can be beneficial for high-income earners with specific challenges hindering immediate mortgage qualification.
Understanding the intricacies of Rent to Own ensures that you approach your housing journey with clarity and informed decision making.
As a trusted source in the rent-to-own community, we strive to shed light on the complexities of the journey to homeownership. Stay informed, explore your options, and embark on the path that aligns with your unique financial goals.
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