Scott Peckford

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The HST has been looming large in the minds of prospective homebuyers. A recent IPSOS Reid survey indicated 40% of BC Home Buyers believe the HST will impact their home buying plans. The question is, how big of an impact will it have?

The jury is still out on exactly how the HST will affect the overall housing market. However under the current proposal a homebuyer purchasing a used or resale home will see only a marginal increase in their actual costs.

According to Tony Spagunolo, “The average buyer purchasing a used home will see an increase of maybe $100 if the HST is implemented in the current form.” Spagunolo owns, The Spagunolo Group of Real Estate Law firms, and specializes in Real Estate conveyance.

When you break down the numbers it becomes apparent Tony is right.

Buyers only pay GST on new real estate. Therefore a resale property should not be subject to HST. Legal fees already include GST and PST therefore will have no change.

The only additional cost will be on home appraisals and inspections. Home appraisers and inspectors currently only charge GST.

In the Okangan an appraisal can cost about $300 while an inspection is around $175. The total GST on both is currently $23.75. Once the new rules take effect July 1st, 2010 the total tax will increase to $57.00 which is an increase of only $33.25, which is not enough to

Who will the HST hurt the most?

Sellers will actually pay quite a bit more HST than buyers. Sellers pay Real Estate commissions which are subject to GST. Considering the average $400,000 sale generates a commission of around $16,000 the HST will add an additional $1120 in tax. Not a small sum, but probably not enough to prevent a sale either.

Perhaps the single group most likely to feel the pinch from the HST are homebuilders. In particular builders who have a building completing after July 1/2010 will be the most impacted. There is a transitional tax planned for these buyers, but rest assured the builders, or more likely buyers are going to absorb some of the new tax.

It seems the provincial government is convinced more tax is the cure for what ails us. Whether this is the case still remains to be seen. At least homebuyers purchasing resale real estate can breathe a collective sigh of relief since the increased cost of the HST will be less than a less than a pizza and a six pack of beer.

A lot of personal finance gurus claim the road to wealth does not pass a Starbucks drive thru. I wholeheartedly disagree. Trying to get rich by cutting a $5 latte from your spending is like trying to dig a basement with a shovel. It can work, but it is painfully slow.

Instead a faster, less painful way is to focus on the bigger ticket items. Negotiate like crazy on major purchases like cars, homes and appliances. It is much easier to save hundreds or even thousands of dollars by tackling the larger purchases.

A smart way to ensure your large purchases do not take a bite out of your budget is to build and maintain an excellent credit rating.

Unless you plan to pay cash for everything you will need to borrow money at some point. A high credit score will ensure your big ticket items cost you as little as possible.

Don’t get me wrong. Skipping the Latte’ can save you money, but the difference between a 650+ credit score and a 540 credit score is substantial. In fact, it can be as much as $64,000 over 25 years. That adds up to over 12,000 lattes! (see chart)

How good of a credit score do you need?

A credit score of 700 or higher should ensure you qualify for the cheapest money for credit cards, loans and mortgages.

How do you find out your personal credit score?

It is possible to get a free copy of your credit report from Canada’s two largest Credit Reporting Agencies, Equifax and Transunion. You will have to search the website to find the number to call. Alternately, you can purchase your report online and have instant access.

Avoid websites offering “free” credit reports. Many of these sites offer a free credit report under the assumption you sign up for a monthly subscription service. It is possible to cancel the service once you have your free credit report in hand, but make sure you know what you are signing up for and how to get out.

The credit score has quietly become the standard test of your financial intelligence. Long gone are the days of acquiring a loan based solely on reputation or your past history with your bank. It is important to not only understand how credit works, but how to improve and maintain your score.

In an upcoming series I will examine the all important Credit Score how it works and give you tips on how to negotiate everything from mortgages, to mini-vans.

Next week: The A, B, C’s of Credit

For more insights on mortgages and money visit http://www.scottpeckford.com

A Rent to Own is very similar to a car lease. With a car lease you put down a deposit and make payments for a specified period of time at the end of the lease you have the option (not the obligation) to purchase the car for a predetermined price.

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.

How Much Money Do You Make? It is a really simple question and one we ask our clients every day, but here is the catch. The question may be simple but the way lenders interpret the answer is anything but simple. In fact, it can be downright confusing.

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.