A rent to own works in much the same way. A buyer puts down a deposit, usually much less than the traditional 5% and makes a monthly payment. A portion of the rent is a credit towards the future down payment.

Example:

Bob cannot get a mortgage because of a low credit score and a small down payment. He has reliable income and a plan to build his credit over the next 24 months.

He decides to do a rent to own with the following details.

• Purchase Price $350,000
• Initial Deposit $5,500
• Monthly Payments $2000 (Rent $1500 Credit $500)
• Term 24 months
• Repairs and maintenance – Any repairs under $500 Bob pays for himself.

At the end of the 24 months Bob will have a full 5% down. ($500 x 24 = $12,000 + $5,500 = $17,500)

The important point in Bob’s case is he needs a plan to build his credit. If a potential buyer is not able to qualify for a mortgage today it is important to determine what steps need to be taken in order to be in the best possible position in the future.

What Are The Benefits to the Seller?

The seller is able to have someone pay higher than market rents and take care of any minor repairs and maintenance. In today’s rental market rent doesn’t always cover the monthly expenses. Also, since the deposit is generally non-refundable when a tenant puts down a money for a rent to own scenario they tend to be really good tenants.

Why Would a Renter Do This?

It allows them the benefit of homeownership without having to qualify at a traditional bank right away.

It also works as a forced savings plan. Since a portion of the rent is going to be used as a credit for the down payment every month that passes the buyer’s down payment increases.

What Makes Someone A Decent Rent to Own Candidate?

Low or No Credit

Credit is certainly one. If a potential buyer has been turned down by a bank because of credit problems an RTO can work for them. However, it is important for the buyer to have a realistic plan to get their credit back on track. (We have a program designed specifically for this.)

New to Canada

Another situation where an RTO can be useful when a buyer is new to Canada. Often when new immigrants come to Canada qualifying for a mortgage can be difficult. A RTO allows the new Canadian to get a foot on the property ladder earlier than would otherwise be possible.

Newly Self-Employed

Buyers who have been self-employed for less than 2 years will find it difficult to qualify for a mortgage at a typical bank. Since most lenders require a history on your self-employment income an RTO can give the self-employed buyer a chance to get their business going while still working towards homeownership.

What Are the Risks for the Buyer?

If the buyer is unable to qualify for a mortgage at the end of the term they risk losing their deposit monies. The biggest mistake buyers make is not having a realistic plan before entering into an RTO. Speaking with an experienced mortgage broker or banker and developing a plan will help reduce but not entirely eliminate this risk.

What Are The Risks for the Seller?

The biggest risk is the buyer will not, or cannot buy your home at the end of the term. If this happens the seller would have to attempt to sell the home again or do another RTO.

If you have any questions on Rent to Owns, or need help with that hard to finance deal please feel free to call or email me.

Rental income is a perfect example.

Some lenders will simply add a percent of the rental income to help qualify, while others will actually reduce the overall monthly payments by a percent of the income. This probably sounds a little confusing so an illustration may be helpful.

Little Story about Jack & Diane

Jack & Diane are buying a house with 20% down. The property has a legal suite with $1000 a month in rental income. They have excellent credit and no other debts. Jack works fulltime, but Diane only works part time and therefore they require the rental income to help them qualify for their dream property.

TD Canada Trust – If Jack & Diane were to ask TDCT how much of the income they could use TDCT would say 50% add back or the equivalent of reducing Jack & Diane’s monthly payments by about $240.

Scotiabank – If they were to ask Scotiabank how much of the income they could use they would say 70% offset. The math is a little simpler they would reduce Jack & Diane’s monthly debts by $700.

Street Capital -If Jack and Diane were to ask Street Capital how much they could use they would say 80% offset. This is the best and they would be able to reduce their monthly payments by $800.

How 3 Lenders Treat the Same $1000 of Rental Income

How 3 Lenders Treat the Same $1000 of Rental Income

The point is not to pick on any one lender. In fact every lender is the lender of choice some of the time. In fact, Street Capital could change their lending policies tomorrow. The point is really to highlight the dramatic differences between how lenders treat income.

To make matters more confusing. If I were to make a change to the above scenario and make the assumption Jack & Diane were only able to put down 15% the amount of rental income allowable changes again, or if the suite is non-conforming the amount of rental income useable will change yet a third time.

A Final Word on Income

Lenders will also treat part-time income, child tax income, self-employed income and out of country income differently. To make matters worse lenders can literally change their policies overnight. It is our job to stay on top of the changes so we can do the best possible job for our clients.

The subtleties can be profound and can literally be the difference between a yes and no, or whether or not the buyer can afford the house they really want or if they have to settle for a condo.

We strive to stay on top of these differences because we know little things make a huge impact on our client’s ability to buy Real Estate. The next time you have a client who is having trouble getting qualified for the perfect place call us with their name and number and we will be happy to see if the problem is simply a case of how the income is being calculated.

Think of it this way. If the cost of everything doubled your debt would only cost you half as much. (Try making sense of that as you go to sleep tonight.)

Unfortunately, there would certainly be carnage along the way. One side effect would be higher interest rates and a corresponding increase in default rates as some borrowers would be unable to make the higher interest payments.

If this is implemented it may be the cure we have to worry about instead of the disease.

Now don’t think this idea has only been suggest by wing nuts or a few crazed economics professors who have never worked in the real world.

A few very, very smart billionaires, Warren Buffett and Stephen Jarislowsky have both suggested it may be the best way to deal with our ballooning debt.

A great article on the perils of this strategy can be found here:

Trying to Inflate our Way out of Debt is Like a Monkey Trying to Outrun a lion

Food for thought, and probably the sanest suggestion he writes is, “…our massive debt can only be dealt with by starting to pay down the debt.”

Sounds a little old fashioned, but it is just crazy enough to work.

Content provided by:

Scott Peckford
www.robyourbank.com

I figure I can watch the few programs I actually enjoy online or, on Apple TV for much less than $120.

Zig Ziglar is famous for calling a television an income suppressant, at $159 a month I tend to agree with him. As a side note if you were to average 2 hours a day watching television you would waste over 30 full 24 hour days a year. That is an entire month! It is almost sick if you think about it.

Here is how we saved the additional $120.

Previous Internet and HD TV charge $159

Current Internet cost $39.

The total to date has been relatively decent considering I have not even had to work too hard at it.

SWP

Content provided by:

Scott Peckford
www.robyourbank.com

I’ve attached a chart showing the path of the variable rate mortgage over the past 18 months. As you can see prime has dropped quite a bit from a high of 6.00% in late 2007 to 2.25% today.

What is more interesting is how the variable rate mortgage has changed over the same period. In early 2008 it was possible to get a decent variable rate mortgage at prime minus 0.85%.

In the middle of the credit crunch when the Bank of Canada was cutting rates, the chartered banks were raising rates. The banks eliminated the prime minus mortgage and for a while the variable rate jumped to prime plus 1.50%.

That is a swing of 235 basis points. In the past few months we have seen the variable rate mortgage drop steadily to the current low of prime plus 0.30%.

Will we ever get back to prime minus rate again?

No one knows for certain. But in a conversation I had with Benjamin Tal in late 2008 he suggested the prime minus days may be gone for good, but he suggested we may get back to prime plus 0.00% -which is beginning to look like a real possibility.

Overall the variable rate does not look like a bad option now when you consider you can get a variable at 2.55% compared to a fixed of 4.19%. For a client with the right risk tolerance the savings can really add up. 

Hedging the Variable Rate Mortgage    

If a client is interested in getting a variable rate mortgage we have started to do quick calculation for them to demonstrate what would happen if rates were to go up. We have started calculating a projected payment with a 5.00% rate. This gives the client an idea of what could happen if rates were to go up.  

For instance: The payments on $200,000 mortgage at 2.55% with a 30 year amortization would be $795 a month. That same mortgage with a rate of 5.00% would be $1067. The difference is fairly significant, but we do it intentionally in order to prevent future surprises for our clients.

In the end the decision to choose a variable rate over a fixed rate is a complicated one. Arming our clients with the knowledge of the pros and cons ensures they make the best possible decision.

 

Too Much of a Good Thing?

When Less Is More

Stroll on to your average car lot these days waiving around wads of cash and you are likely to negotiate a very sweet price on a new car. However, if you try the same tactic when negotiating a mortgage rate you may be surprised to find more is not better. In fact a smaller down payment is usually the best way to ensure the lowest possible interest rate.

A common misconception in the mortgage industry is the importance of down payment. Don’t get me wrong a down payment is great and the more the better when qualifying for a mortgage, but lenders don’t often offer their best rates to customers with the largest down payment.

This may sound crazy but the reason for this is simple –a low down payment mortgages requires Mortgage Default Insurance or CMHC. CMHC (Canada’s Mortgage and Housing Corporation) is a crown corporation set up 60 years ago to, among other things, help Canadians achieve home ownership. CMHC provides mortgage default insurance to borrowers for the benefit of lenders.

Borrowers who put down less than 20% when buying a home are required to have and pay for mortgage default insurance.

Why would my bank want me to put less money down?

The simplest answer is CMHC provides a fairly solid guarantee. CMHC will guarantee the lender against loss. If a borrower is unable to make their payments CMHC will make sure the lender does not lose money. And we all know that Banks like losing money about as much as a two year old boy likes taking a bath.

Put another way, having CMHC on a mortgage is like having the government co-sign the loan. The bank knows if anything bad happens they have the backing of the Canadian government –not too bad. As a result lenders will offer the best interest rate for a CMHC insured loans.

What is the catch?

The catch is borrowers must pay for the insurance and the smaller the down payment the larger the insurance premium. The premium is added to the total loan and does add to the overall cost of the mortgage. <See chart>

CMHC Insurance Cost

*Assumes income qualified, owner occupied and 25 Year Amortization

How Does Mortgage Default Insurance Work?

Bob and Betty are buying a home for $400,000. They have $40,000 or 10% to use as a down payment and want to get the best possible mortgage. Since they have only 10% down they must get mortgage default insurance. Currently a great insured discounted fixed mortgage is only 4.19%. Here is how it would look for a 25 year amortization:

If you have been putting off looking at homes because you are diligently saving to have a massive down payment – stop it! Talk to a mortgage planner today about all your options. The home of your dreams could be closer and cheaper than you think.

Interest rates have been on a bit of rollercoaster ride the past few weeks. What has prompted the recent jump in rates and what key indicator should you watch?

Why The Jump in Fixed Rates?

Rising commodity prices and a surging Canadian dollar have pushed up bond yields.

What to Watch?

Bond Rates are the best indicator of where fixed rates rates are headed. Bond yields have climbed from a low of 2.39% a week ago to 2.51% today. FYI bond yields were 2.71% June 8. No one knows if this is a temporary blip or a trend.

Where do We Go From Here?

Unfortunately, predicting long term rates is a fool’s errand and beyond the scope of my cranial capacity. The important thing to keep an eye on is Bond Prices and lock in when you are no longer comfortable floating. To estimate current fixed rates add 1.80% -2.00% to the 5 year bond.

Track bond Prices here at Bloomberg

What I learned filming a Reality TV Show

 The pilot for our Reality TV show, “Clean Slate,” was filmed in Kelowna, BC last week. It was a blast and I will definitely never look at Reality TV the same way again.

The biggest surprise for me was how well the participants did in each of the challenges. One challenge in particular called ‘Extra Cash,’ highlighted just how creative the teams could be.

In this challenge teams were given the following scenario:

“Imagine your car broke down and you need $150 to repair it. Unfortunately, you have no savings and you cannot put the repairs on a credit card. (Debt is the most frequent method to cover unexpected expenses.) Instead you must think of a way to earn the ‘Extra cash.’ You have 36 hours to earn the money and you can earn it anyway you like, it must be legal and you cannot ask a family member or friend for the money. Finally, you cannot tell people you are raising money for a charity in order to have them pay your more money -Good luck.”

To be honest I was a little worried about this challenge. Due to a change in the production schedule the timeline was shorter than originally planned and I was concerned the teams would not be able to earn the minimum $150 required to win this challenge.

Thankfully, my concern was unfounded. The last place team earned over $500, while the winning team earned almost $1200!

I was stunned how well each team completed this challenge. How on earth did they earn so much money in such a short time? And what, if anything, can we learn from their remarkable success?

When I looked at how each team accomplished such amazing results three key points emerged.

First, every team relied on their network of friends and contacts to complete the challenge. In fact, one team used Twitter and Facebook so much they killed the battery on their Blackberry.

Second, they were not afraid to ask for help. One team called on all of their wealthy clients and offered to cut lawns, wash cars, and basically do any task they could reasonably be paid for.

Finally, they went to work right away. They didn’t have time to over analyze every option or to focus on the problem. The timeline was way too short. Instead, they made a decision and got to work.

There you have it a model for earning a little extra money, or for getting that seemingly impossible task completed in record time.

1. Rely on your network
2. Ask for help
3. Just do it – Take action right away

To be fair, the teams did have a bit of an advantage. Having a camera, a cash incentive and a stopwatch really created a sense of urgency and all the teams did better because of it. The amount of money they earned may be a little bit of a stretch, but the point was made – Force people to think creatively and they will not only surprise you, but themselves in the process.

What is Clean Slate?
Clean Slate is a reality based TV show where teams compete in a series of challenges designed to test their ‘Money Smarts.” Think Amazing Race, but instead teams are competing to have their debts erased and earn a ‘Clean Slate.’

Follow Clean Slate on twitter