Rental Income is being recalculated. Under the old system we could deduct $800 of rent for every $1000 of rental income. Under the new system we can only deduct approximately $200 per $1000 dollars of rent.

For a buyer to qualify for the same amount of mortgage after the changes the rent has to increase to $4000 a month or the purchase price has to lower by almost 20%.

Bob & Cindy

Example: Bob and Cindy have good credit, monthly debt $300 of a month and $50,000 of family income. They are buying house with $1000 of suite rental income.

When does this take effect?
April 19, 2010 is the official day of the changes. However, anyone who has entered into a contract prior to April 19^th will be qualified under the old rules.

Does this apply to in-law suites too?
Yes. This will apply to legal and illegal suite rent. The only possible exception is if a borrower has 20% down.

What if a borrower has 20% down?
If a borrower has 20% down there may be some exceptions. Exactly how this is going to play out will be more clear once the changes take effect. (I will keep you posted)

What does this mean?
If you have first time buyers who are considering buying and will be relying on rental income get them out house hunting now.

Oh, and get them pre-approved with someone who knows how all this stuff works while you are at it.

Scott’s latest video demonstrates the difficulty in selling potential value. Sellers occasionally attempt to list their home for more than market value because of a perceived notion of potential value. Unfortunately it is often difficult to convince a buyer of this potential value.

For instance a home in the Agricultural Land Reserve (ALR)may have the potential to be changed to multi-family use, but there are rarely any guarantees until you will have the zoning approved. Of course once the zoning has been changed it is no longer potential value, but real value.

Let us know your thoughts, comments or feedback.

If you are considering buying a home don’t forget about the importance of your credit score. This video explains what a credit score is and where it comes from.

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 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.

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.