I HEARD OF A GREAT MORTGAGE OPTION – RENT TO OWN
With the new rules in place, rent to own may be a very tempting offer to reach home ownership. Is this truly a great option? Rent to own could be an option if it is set up correctly. Let’s look at what a rent to own agreement would need to look like to make the contract work.
What you will need
- You will need a market rent appraisal to determine the amount of the rent for the property. Only the portion over the market rent can be considered towards the down payment. Only the portion over that amount can be used as down payment and should be paid with 2 separate cheques.
- You will need a contract signed and dated at the beginning of the term when you (the tenant) moves in. If you are already renting the unit and are switching to a rent to own then a new contract should be drafted.
- You may be required to provide a high deposit (usually around 10K). The contract must stipulates that the deposit is refundable should the deal not go through. Any other lump sum payment should be stipulated in the original agreement.
- You will need to include the date of purchase and the purchase price agreed upon when the sale occurs at the end of the rent to own.
The pros and cons of rent to own
Looking at this list, rent to own looks like a great option. Let’s look at the pitfalls of this kind of scenario.
- You will be paying higher rent than you would normally pay for the unit. The extra portion is not refundable if you do not purchase the unit. If you can pay that amount why not include that amount in your own bank account until you are in a position to purchase a home.
- You will need to prove the actual amount paid towards the down payment, or you might not be able to use that amount. You will be limited in the number of mortgage lenders you can access since many lenders consider this type of transaction like ‘gifted equity’. Gifted equity is only acceptable if it comes from an immediate family member.
- You will need to make sure that all parts of the contract align with the insurers (CMHC, Genworth and Canada Guarantee) or the insurers will not insure the deal and you will require a higher down payment (20%) to make the deal work.
- You will need to protect your deposit by making sure that there is a close that stipulates that your deposit is refundable. Many times rent to own sellers do not want to stipulate that the deposit is refundable. Even if it is refundable, it does not mean that the seller will give you back the money. They may have already spent it. It would be more prudent if this amount was held in trust at a lawyer’s office. This would better protect you.
- You will need to negotiate the purchase price at the beginning of the contract. Should the market stay the same or should the property be reduced in value, then the higher agreed upon purchase price may result in a non-purchase. You will need to pay the difference out of pocket - which means you have over paid for the property. Should the market increase and the set price is lower, the landlord may not want to sell.
- You will need to monitor your financial situation. If the mortgage rules change within the time frame of paying rent, your financial situation changes, employment changes, you end up having any credit issues or your debts are too high resulting in the inability to borrow as much as the agreed price of the home, you will not be able to qualify for the purchase. You may need to look at alternative lending, thus requiring more money down and higher mortgages rates. The contract date is often not flexible and if you do not qualify for a mortgage at the end of the term, you will lose all the extra money you have paid for the rental unit. Also should life get in the way and you are late on the rent payment, the contract may become null and void.
The bottom line
Rent to own are very lucrative for the seller and very seldom works out in favour of the renter. Should the seller declare bankruptcy, you will need to be added to the list of creditors and be paid pennies on the dollars if paid at all. You will lose your deposit money.
Other things to be considered: Did you get independent legal advice before signing the documents? Who is the rightful owner of the property?
Are you actually paying the correct party?
Look into registering the lease against the title of the property that will prevent the owner from selling the property from under you. There is a cost associated to registering a lien and regulations in types of lien allowed.
Before you enter in such an agreement it would be best to talk to reputable mortgage brokers. Most brokers and lawyers will tell you – RUN AWAY FROM THIS TYPE OF DEAL.
I HEARD OF A GREAT MORTGAGE OPTION – RENT TO OWN: Work alongside The Wilson Team to get your purchase power on track. Lots of different options are available and would be a more reliable way of purchasing a home. We will provide you with all the ins and outs of these types of options and we will show you better options for you. Start your own RRSP account for the down payment. Collect the tax break and invest that money in your down payment. Look at a flex down program or gifted down payment program etc. We will discuss all your options!
OMG!!! I SAW A GREAT MORTGAGE RATE QUOTED ONLINE!
How often do you troll the internet to find the best mortgage rate available? You see unbelievable rates as low as 1.98%. Can you really get those rates? Before I even answer that question let me help you understand everything behind a rate.
As a mortgage broker my job is to inform you on products out there. First let’s understand who the players are. You can deal with either one of the major banks, the credit unions, monoline lenders or even private lenders if need be. We all know who are the major banks and credit unions. So who are monoline lenders? These are lenders that only offer one product - mortgages (thus the term mono-line). They use the same money to lend as all the major banks. They all fall under the same security umbrella. Think of it as retail vs wholesale. You get amazing customer service without the added costs, therefore saving you thousands of dollars!! The private lenders are individuals that either pool their money or use their own money to lend to others when situation prevent clients from accessing traditional lending. They often charge a higher percentage.
There are several advantages and differences when it comes to choosing a lender –The first thing is the mortgage penalties. You can get a product that will allow you to break your mortgage and pay no penalty, or pay only 3 months interest, or interest rate differential (IRD). Some lenders even have a specific rate percentage you would pay. – For example, the mortgage penalties with the banks are based on posted rated which is 4.64% making the interest rate differential very high. The mortgage penalties with the monoline lenders are approximately 80% less because they use discounted rate to determine the interest rate differential. This saves you thousands alone should you ever need to break your contract. Each product has specific penalty rates. Most of you are thinking but I will not break my mortgage. I am not going to move in the next five years so why should I even worry about the penalty? Studies have shown that 75% of home owners make changes to their mortgage within that period. Many homeowners pay a penalty during the term. Life happens! NEVER discount the amount you pay in a penalty. Life happens!!!
The second thing we need to discuss is the type of charge. Many lenders are now using collateral charges. You can either choose a product with a standard charge that is registered on title in a document that includes the important terms of your mortgage loan, such as the principal amount, interest rate, term, payment amount, amortization period, etc. A standard charge is registered for the actual amount of the mortgage, securing only the one mortgage loan. It is also portable and transferable to another lender anytime without charge. This means no fees to shop around on renewal. It is also assumable to another buyer.
A collateral charge allows you to use your home as security for one or more loans. The lender may and will register the charge for an amount that is more than your initial loan, you may be able to borrow more funds without having to register a new charge, provided the total amount owing is no more than the principal amount of the collateral charge. (You would need to have more than 80% equity in your house to access any of those additional funds and would need to qualify for the additional loan – This is not line of credit that automatically accessible). The specific mortgage loan terms (such as the mortgage loan amount, interest rate, term and payment amount) are in a separate document (the mortgage loan agreement), and not included in the document registered on title. Also with a collateral charge the banks love to attach all your other borrowing to your mortgage such as lines of credit, credit cards etc. You may see this as a second or third registration on your file. If you need to increase the mortgage then they also don’t do blend and increase anymore which means you get a 2nd mortgage that renews at different times as your first mortgage. Should you want to move your mortgage to another institution, all those loans would have to be paid out and the registrations would have to be cleared prior to moving your mortgage.They may even be a fee to close these types of mortgages. These types of mortgage may chop at your equity.
So by now you are wondering is collateral charge a bad thing. It depends on your individual situation. All products have their own merits and downfall. It is important to understand each one before signing on the dotted line.
So by now you are wondering, can I get those rates, absolutely but with strings attached. Can we provide you those rates, absolutely but we will offer you all options so you will not have any surprises and know what you are signing when you sign on the dotted line.
Rates are driven by the product attached to it. Let us at the Wilson Team help you make the best decision for you and show you the different products available to you. We worry about getting you the best rate for the product that suits your needs. We will answer important questions such as: Are you paying the penalty on the quoted rate or on posted rate? Will this mortgage cost you unnecessary interest? We will also provide you after service assistance; we review your mortgage on a yearly basis to see if we can save you additional money. We do more than quote a rate!