Can’t afford that first house? Renting to own can get you started

Personal Finance Family Finance

Long a little-known alternative path to homeownership, homeownership rental programs are about to gain new prominence in Canada

Publication date:

Jan 27, 2022 • Jan 28, 2022 • Read 5 minutes • Join the conversation A for sale sign is displayed outside a home in Toronto. Photo by REUTERS/Carlos Osorio files

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In an ongoing series, the Financial Post examines personal finance questions related to life’s great milestones, from marriage to retirement.

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Susan and George were preparing to buy a new home in Woodbridge, Ontario four years ago, but ran into a major hurdle: With a previous blemish in their credit history and the home as their second purchase, they had a 20 percent mortgage. necessary. deposit, which they just didn’t have.

They made an offer on a house, but their financing was rejected at the last minute. Rather than give up, they turned to a rental company, Clover Properties, which raided an investor who bought the house and agreed to let them rent it until they could buy the property in its entirety.

“I had wanted to go the traditional route and my husband had it as a backup, but in the end it was the umbrella we needed,” Susan said. “It was phenomenal.”

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In the end it was the umbrella we needed

Susan

The couple, whose names have been changed to protect their privacy, bought their home in December 2021 with a 25 percent down payment.

Long a little-known alternative path to home ownership, home-renting programs are about to gain new prominence in Canada.

After the Liberals pledged $1 billion for a national housing-rent program, Prime Minister Justin Trudeau, in his December mandate letter, directed Housing Minister Ahmed Hussen to create a fund to test such projects across the country. , to develop and scale up “to help tenants move more easily toward homeownership.”

Hussen recently launched a public call for ideas on what a future program should look like, but they’ve been around in Canada in one form or another since the 1970s.

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In a typical rent-to-own model, a tenant commits to renting a property for a number of years before purchasing it from the homeowner at the end of the lease for a fixed price. During the lease term, the future owners pay rent plus an additional monthly fee, which they can use to build up their down payment.

“Rent-to-own is not only designed to help people who may not qualify with the banks, but it should give people the time and starting job they need to get mortgage-ready,” said Rachel Oliver, co-founder of Clover Properties and co-wrote Rent to Own Essential Guide for Homebuyers: Your Key to a Fresh Start and Richer Future with her husband, Neil Oliver.

It should give people the time and runway they need to get mortgage-ready

Rachel Oliver

The programs are ideally suited to homebuyers who are just short of qualifying for a mortgage, Oliver said, such as those who have saved enough for a down payment but have a spotty credit history or have student or car debt to pay off.

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“The banks are very specific in terms of what they want for a deposit,” she said. “Someone with perfect credit can get away with five percent, but someone with imperfect credit will have to put down 15 to 20 percent.”

Renters who go through the Clover program require a five percent down payment and then use their three or four year lease to roughly double it. The program also includes built-in features for improving a tenant’s credit score, Oliver said.

In a slightly different approach, Bosa Properties Inc.’s Bosa Equity program. of Vancouver allows 25 percent of a tenant’s monthly rent to accrue as a down payment toward a future home purchase from the real estate company. The credit is valid until two years after the end of the lease.

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Going through a rent-to-own program could prevent Canadians who are a little short on a down payment from seeing home prices rise much faster than their income and savings, Oliver said.

It can also be cheaper than choosing to go with a private lender, she said, which can come with legal and mortgage costs and higher interest rates than an “A lender.”

But not all programs are created equal, said Romana King, a personal finance and real estate expert and the author of House Poor No More. She encourages homebuyers to do their due diligence to ensure plans include appropriate regulatory security checks, such as holding the homebuyer’s growing down payment in a trust account.

You can’t just take the money out whenever you want and use it however you want

Romana King

“There are certain rules that people with trust accounts will follow,” she said. “You can’t just take the money out whenever you want and use it whatever you want… (You) want to make sure (your) money is safe.”

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Some plans also include prepayments or monthly fees to join, King said. In addition, home buyers need to know what happens to their security deposit if they don’t buy the property at the end of the lease term or choose to walk out during the term.

Oliver of Clover said her company has a 90 percent success rate and will renew the lease for living conditions such as divorce or job problems if the tenants otherwise fulfill their contract terms.

“Life happens, circumstances happen, COVID happened and it disrupted people’s plans to restore their creditworthiness,” she said. “We totally get that.”

Clover has never evicted a tenant and has involved the landlord and tenant board only 10 times in its approximately 600 deals in cases of late monthly payments, Oliver said. The office always opts for negotiation to give tenants time to catch up.

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If tenants choose not to pursue the process, usually because of a divorce or divorce, she said the company is putting the house up for sale. Clover can get back up to 100 percent of their down payment, depending on the amount the property is sold for and the costs associated with the sale.

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Oliver said happy to see the federal government pursuing a national strategy, but fears it will be similar in execution to other home-buying programs the government has introduced, which have “big intentions” but were only available. for Canadians with perfect credit scores.

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She also hopes the federal program will give homebuyers the experience of choosing the home of their dreams, rather than choosing from a housing stock specifically designed for owner-occupied home buyers.

“I don’t think these people deserve to be stigmatized,” Oliver said. “Going house hunting…is an important, emotional experience of owning a house.”

Hussen’s press secretary Arevig Afarian said in an email that the program “will be designed to help renters achieve their homeownership dream, which has become out of reach for far too many Canadians.”

The ministry will work with municipalities, provinces and territories, indigenous governments and the private and non-profit housing sectors, among other stakeholders, in developing the program.

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This post Can’t afford that first house? Renting to own can get you started

was original published at “https://financialpost.com/personal-finance/family-finance/cant-afford-that-first-home-renting-to-own-might-get-you-started”