Rent To Own

General Pam Pikkert 16 Mar

Rent to Own

There seems to be a lot of confusion over this topic which makes it ideal for us to look at this week. 

A rent to own is an agreement between a landlord and a tenant that within a predetermined time frame the tenant will purchase the property they are renting.

Who would consider this type of an arrangement?

                As far the landlord is concerned there are a couple of reasons.  We have all heard the horror stories of properties left in shambles by careless, even destructive, tenants.  If a landlord knows that the person they are doing the rent to own with is planning to purchase the property, it stands to reason that the property will be better taken care of.  They get the peace of mind knowing that their property is in good hands. Secondly, there is financial benefit.  If for some reason the tenant does not finalize the rent to own agreement, the agreements generally allow the landlord to keep a part or all of the deposit.

                As for why a tenant would consider this, there are any numbers of reasons.  Perhaps an illness or other life issue caused the credit to decline to the point that the dream of home ownership is 2 or 3 years away.  Perhaps they have not yet saved the 5% down. 

No matter the reason you definitely want to read the dos and don’ts of the rent to own. It’s so important to make sure both parties are protected by a well laid out agreement.  I would strongly encourage you to seek legal counsel to protect your interests no matter which side of the fence you are on. 

  1. Get pre-qualified – If you are considering this agreement because your credit is damaged then you certainly want to make sure you know exactly which steps you will need to take to re-establish sufficiently.  Lenders like to see 2 trade lines (credit card and a vehicle loan for instance) reporting perfectly for 2 years before they will offer you a mortgage. 

 You also want to make sure that you are able to afford the property given your affordability ratios. 

As the landlord, with written permission, the mortgage professional will be able to offer some assurance that you are not wasting your time.   That the client will in fact be in a position to purchase down the road.

  1. Deposit – An initial deposit on the property will be required.  The agreement will lay out exactly how much it is and whether or not it is refundable if it does not end up closing.  Keep a copy of the cheque and the bank statement showing it clearing the account.  It may be required.
  2. Additional amount towards the down payment – The entire monthly rent cannot be applied to the down payment.  You must set the larger amount as going to the rent and anything additional will count towards the down payment.   The agreement should also address what happens to the additional funds should you not proceed.
  3. Property Value – Property values can be volatile and it is darn near impossible to know where they will be in 24 or 36 months.  If you agree on a price of $300,000 and at the time of purchase the home is worth $250,000 you will be unable to obtain a mortgage for the original amount agreed on.   Even if both parties agree to the purchase price a lender will not allow it.  To protect everyone you should agree that the property’s value will be determined at the time of purchase by an appraisal from a mutually acceptable appraiser.  The tenant is protected against the price falling and the landlord will get fair market value if it increases.  That’s a win.

Taking the time before you sign and getting proper legal and mortgage professional advice can save you oodles of headaches down the road and more importantly save you money.

Recipe for A Great Mortgage

General Pam Pikkert 10 Mar

Recipe for The Perfect Mortgage

 

There is a constant bombardment by the media about all things financial.  The sky is either falling or everything is hunky dory.   You want to be a savvy consumer when it comes to your finances but it can be challenging to decipher all of the terms and conditions.  This week I am going to present you with the recipe for the perfect mortgage.

Add 2 parts Interest Rate

Your payments are directly related to the interest rate you accept. 

$300,000 at 2.69% (5 Year Fixed) =$1372.45 /month and $254,878.62 upon renewal

$300,000 at 3.24% (5 Year Fixed) = $1456.94/month and $257,595.13 upon renewal

A little leg work can save you $84.49 a month which adds up to $5069.40 over the 5 years AND you will owe $2,716.51 less on renewal. 

Let’s take a minute and focus shall we?  I have heard the average consumer would rather get a root canal than renegotiate their mortgage to which I reply, really?   If we as consumers are willing to visit 3 stores to save $100 on a television then it only stands to reason that we would happily go through the mortgage process to save $7785.91. 

We can even set it up so that $84.49 a month that you will save could go directly into a High Interest Savings Account and make the magic of compound interest work for you.

Add 2 parts Best Mortgage Terms

All mortgages are NOT created equal.  This is nothing but the truth and once you sign the contract you have bound yourself to the terms as outlined.  But knowing what you should be looking out for can be tricky so let’s take a quick look.

  1. Collateral Mortgage – Basically this is where the lender will register the full amount of your property value as compared to just the amount of your mortgage against the title.

* The benefit is that if you would like to borrow more against your current home down the road you can do so without needing a lawyer to register the new amount.

*The downside is that your bank is now able to tie any other borrowing you do with them to your mortgage meaning that when you go to sell, your equity can be used to pay out all debt obligations to them.  The other potential issue is that this type of a mortgage is not easily transferrable which may leave you in a position of having to accept a renewal offer which is higher than you may otherwise find in the market

* The easiest solution is to keep your mortgage with a different lender which sidesteps the tied lending issue or decline the offer to accept the collateral mortgage in the first place.

  1. Prepayment Privileges – Make sure your prepayment benefits match your intentions.  If you are not likely to prepay on your mortgage then you may want to accept a product which offers a lower interest rate in exchange for a decreased pre-payment privilege.  If however you plan to be aggressive with your mortgage re-payment then make sure the terms are in your favor
  2. Penalty – There is no set standard in Canada as to how the penalties are calculated if you break your mortgage contract early.   The onus is on you to ask questions about your lender’s calculation until you understand.  

The other thing to watch out for is that certain lenders will offer ridiculously low rates but will assess an additional fee on top of the penalty if you break the contract early

  1. Portability – This is the ability to take your mortgage with you from property to property and avoid the penalty all together.

*Will your lender lend everywhere? Do they have property type restrictions?

For example if your dream is to own an acreage and to keep your costs in line you plan to start in a manufactured home you really should make sure the lender you are signing with likes this type of a property.

 

So there you have it.  The recipe for the perfect mortgage in bite size pieces.  As always contacting a mortgage professional is really the best strategy to avoid the pitfalls and perils of the mortgage world.  Have a great week!