Is Rent-to-Own a Smart Way to Buy a Home in Canada?

With home prices still out of reach for many Canadians and mortgage qualification getting tougher, more people are exploring alternative paths to homeownership. One option that’s been gaining traction is rent-to-own.

At first glance, rent-to-own might seem like the perfect bridge between renting and owning—but it’s not without risk.

Many people have lost significant deposits and rent credits because they couldn’t qualify for a mortgage at the end of the term, or because the agreement they signed wasn’t legally sound. That’s why entering into a rent-to-own contract should never be done without consulting a real estate lawyer and a mortgage professional.

These experts can help ensure the terms are fair and that you’ll be in a good position to qualify for financing when the time comes.

Let’s break down how rent-to-own works, and what to watch for.

What Is Rent-to-Own?

In a rent-to-own arrangement, you agree to rent a home with the intention—or sometimes obligation—to buy it after a set period, usually one to five years. Each month, you pay rent like you would normally, but a portion of that payment goes toward your future down payment. That portion is often called a rent credit.

There are two types of rent-to-own agreements:

• Option-to-purchase: You have the right, but not the obligation, to buy the home at the end of the lease.
• Lease-purchase: You commit upfront to buying the home at the end of the lease. Walking away could mean losing your deposit and rent credits, and potentially facing penalties.

Why Rent-to-Own Appeals to Some Buyers

Rent-to-own can offer some major advantages:

• Locked-in purchase price: You agree on a future sale price today, protecting you from market price increases.
• Lower upfront costs: Instead of a full down payment, you pay a smaller deposit—typically 2–3% of the home’s price—and build the rest through rent credits.
• Time to prepare financially: You get time to build credit, increase savings, and improve your ability to qualify for a mortgage.
• Immediate move-in: You get to live in the home you plan to buy, even before you can officially purchase it.

The Risks and Realities of Rent-to-Own

Rent-to-own also comes with significant risks:

• You might not qualify for a mortgage: If your income, credit, or debt situation hasn’t improved by the end of the lease, you might not be approved for a mortgage—and you could lose your entire investment.
• Upfront and ongoing costs are higher: You’ll need to make an initial deposit and pay higher-than-market monthly rent to build your down payment.
• You may be responsible for maintenance: Many agreements require tenants to take on repair and upkeep costs, unlike a regular rental.
• Some agreements aren’t well structured: Without legal review, you could be signing a contract that doesn’t protect your interests or hold the seller accountable.

How the Numbers Work: A Sample Scenario

Let’s say you enter into a five-year rent-to-own lease with the intent to buy the home at the end.

• Purchase price: $550,000 (locked in)
• Initial deposit: 2.5% = $13,750
• Target down payment (10%): $55,000
• Remaining down payment needed: $41,250

To build that $41,250 over five years, you’d need to contribute $687.50 per month as a rent credit ($687.50 x 12 months x 5 years = $41,250).

It’s important that your monthly rent in a rent-to-own agreement reflects fair market value. Any additional amount you’re contributing toward the future down payment—commonly called an option payment—should be clearly separated from the base rent. Best practice is to structure these as two distinct payments, with the option payment held in trust or by a lawyer. If, at the time of your mortgage application, CMHC’s appraiser determines that your rent was artificially low, they may not recognize the full value of your option payments as part of your down payment.

That’s why it’s essential to get guidance from a mortgage expert who can review the rent structure and confirm that your credits will be accepted by lenders when the time comes.

What Happens If You Don’t Buy?

If you decide not to purchase the home—or can’t get approved for a mortgage—you may lose the deposit and all the rent credits you’ve accumulated. Some agreements even include penalty clauses requiring additional payments.

Some government-backed rent-to-own programs include protections like partial refunds, but private contracts often don’t. Make sure you know exactly what the consequences are if things don’t go as planned.

Government Support for Rent-to-Own

In 2022, the federal government allocated $200 million to support rent-to-own housing through the Affordable Housing Innovation Fund. This funding is designed to help developers offer more accessible homeownership opportunities to Canadians struggling with affordability.

To qualify for this funding, programs must include fair and transparent terms, including limits on rent increases, clear purchase pricing, and provisions for refunds if the purchase doesn’t proceed.

While this initiative is a step in the right direction, most rent-to-own offerings on the market today are through private companies or investors, and their terms can vary widely.

Final Thoughts: Is Rent-to-Own Right for You?

Rent-to-own can be a powerful tool to break into the housing market—but only if it’s done right. It’s not a shortcut, and it’s not risk-free. Make sure the contract is crystal clear, the rent is in line with the local market, and that your long-term mortgage qualification plan is solid.

Before signing anything, speak with both a real estate lawyer and a mortgage professional. They’ll help ensure that the agreement is legally sound and that you’ll be ready to secure financing when your lease ends.

Have questions about whether rent-to-own could work for you? Reach out—we’d be happy to help you review your options and plan for success.