Renting Vs Buying Real Estate - Evaluating - Part 2

Renting vs Buying Real Estate - is it right for YOU (PART 2)

Ok, so now you've considered your options and want to explore this buying a home thing more. Why not? More and more people are making that decision and traditional ways of waiting until marriage or having a partner. Even if in a relationship/married, perhaps you wanted to  have more time together first, pay off student debts, travel, or whatever your personal situation. It doesn't matter when and it's about being smart and analyzing whether it is or isn't good for your personal needs.

There is absolutely nothing wrong with renting and current lower vacancy rates here in Barrie (and Ontario-wide) are showing that more people are preferring this. So is home ownership over-rated? There's value in both methods and again, it's all about you whatever your lifestyle dictates. There are many programs available so let's look into no money down and rent to own which are many questions we get asked as well.

So, considering the ads with the Zero Down Payment Mortgage? Before you get sucked in and give your information, know what the requirements are. Always remember, if it sounds too good to be true, it probably is.

What you need to know: Credit Score Requirements

To qualify for a no down payment mortgage you need a credit score of at least 680. You are likely to have a 680 credit score if you pay credit cards and other loans on time, and there are no bill collections in your name. You will need to have three (3) years of consecutive employment in order to qualify for a zero down payment mortgage.

A no-down payment Mortgage is not for everyone. Please discuss your personal financial situation with your broker to get informed about this product - and find out if it's right for you. A no-down payment Mortgage is also known as a cash-back Mortgage. This product can also be used to help with mortgage closing costs - or for other things around the house such as furniture, repairs or appliances. Again, it's not for everyone and if you're not good at budgeting, and you also need to know whether the home qualifies (not overprices and will appraise for the value). You're also not going to have instant equity if not putting any money into it so if you need to resell for whatever reason in a shorter amount of time, well, you're not making money either.

How Down Payments Affect your Mortgage and Mortgage Size

• Your down payment is used to determine the maximum price of a home you can afford
• Your down payment will have an effect on your mortgage size and mortgage payments: 
• The more money you put down, the smaller your mortgage and the smaller your payments will be.
• Your down payment also determines the amount of CMHC insurance you pay: 
• As stated above, a down payment of less than 20% forces a CMHC mortgage default insurance requirement. The cost of the insurance will fluctuate depending on the size of the down payment for your mortgage.

How can you finance your down payment?

Besides traditional saving methods, or the sale of personal assets, various methods of obtaining money for your down payments exist. One of these methods is the Home Buyers' Plan (HBP). It is a program that allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSPs) to buy or build a a home.

Home Buyers' Plan (HBP)

The Canada Revenue Agency outlines the Home Buyers' Plan (HBP) as a program that allows you to withdraw up to $25,000 from your registered retirement savings plan (RRSPs) to buy or build a qualifying home for yourself or for a related person with a disability .

Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the HBP, or they may not be deductible for any year.

Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.

Topics

Conditions for participating Do you qualify, how and when to withdraw funds from RRSPs	How to withdraw for the Home Buyers' Plan (HBP) Follow the steps to withdraw funds from your RRSPs
Cancelling Situations when you can cancel your participation, how to cancel and due dates	Repayments When and how much to repay, how to make a repayment and exceptions to repayment dates
Special circumstances What if the participant dies, becomes anon-resident, or reaches the age of 71	Important dates

Forms and publications

• Guide RC4135, Home Buyers' Plan (HBP)
• Form T1036, Home Buyers' Plan (HBP) - Request to Withdraw Funds From an RRSP
• Schedule 7, RRSP Unused Contributions, Transfers, and HBP or LLP Activities

RENT TO OWN

You see all the ads, have heard about it and wonder if this is a consideration. Sure, everything is a consideration if it gets you one step closer to your goals. We're here to help educate you and decide what program is or isn't right for you. Fortunately, we work with a lot of investors and mortgage brokers that offer many variations of programs available to people that choose to work with us and seek assistance. 

The most important things to know about rent to own?

• it's not for everybody
• it must be a win/win
• must be disciplined or be willing to learn to be disciplined about monthly payments because it's forcing you to save for a downpayment if you're not already able to do so
• it's not for everybody
• must be a win-win

That's right. Intentionally said those twice because that's the only type of clientele we work with. Those that analyze each scenario on a case by case basis to make it beneficial to you, the home buyer and the investor wanting to help you. That's right. The investor purchasing the home to help you be able to buy it and get you one step closer to home ownership that you've only dreamed about. 

Not going to mislead you. It is a business and there is an invested interest for the investor of course because there are books out there, courses and online resources teaching people to get on the "rent to own" bandwagon. This is why we interview our investors to find out their intentions of wanting to offer rent to own programs. Yes, we turn people away and only work with a select, elite few and must be referred to us. Why? Here's why...

You've never owned a home before or have owned but got into a financial situation and think rent to own is a good option for you. You seek us out for information and develop a trust. You want to own a home so badly and will practically do anything (legal of course) to get it. Perhaps you may not read the papers before you sign and willing to borrow from anyone to get whatever down payments are necessary so you can be a home owner. We can honestly tell you, this is not the way to be at all. You're setting yourself up to fail before you've even started and actually this is taking you further away from your goal of home ownership. You lose time, money, effort and give yourself even more stress that you bargained for. 

If you've never owned a home before, how do you understand those legal documents? You're trusting someone to explain them to you that have an invested interest because they're making commission or sale right? Realtors are governed to be ethical and have a business standards of course. However, there's also the obligation to inform you of everything and probably a good idea to have a conditional clause that you have the right to have reviewed by a lawyer. That's what the professionals are trained for and really important for you to know your rights and entitlements.

After typing, realize rent to own is a whole other topic. So let's make a Part 3 and call this a series!

Happy investing in you and happy new year!

*not intended to solicit anyone with any written agency agreements. This blog is intended to provide information for educational purposes only

Sources:
Canada Revenue Agency

Renting Vs Buying Real Estate - Calculate and Evaluate!

So the New Year is upon you and you're probably thinking about making changes in your life. One of those, whether single, with a family or not, is thinking about whether you should keep renting or perhaps time to buy a house. Great goal for sure!
So by now you're scouring the internet, checking out Realtor.ca aka MLS.ca and other sites to see what the going prices are, what pretty houses you like, etc. But really, can you AFFORD it and is home ownership right for you at this time in your life? This is a Part 1 Series and Part 2 will follow immediately tomorrow.

Before you make hasty financial decisions, you're a smart person so analyze before just jumping in. You've probably come across a rent vs buy calculator or two which is also a great start. However, the problem with most rent versus buy calculators is that they fail to account for the additional costs that come from moving from an apartment or townhouse with little to no yard or driveway, into a 2,500 square foot home complete with a yard and a driveway.

When you move into a home that is double the size of your rental home, there are costs  you need to be aware of that Mortgage Brokers, Real Estate Lawyers and Realtors may or may not be bringing to your attention. Facts to consider are:

• You will now have to pay the utility bills on heating and cooling twice the square-footage.
• You have twice the space to furnish and decorate (and you WILL buy more furniture to fill up that space)
• You will now have a yard and driveway to maintain (if moving up from an apartment - more grass to cut, trees to plant, gardens and flowers in wanting to "showcase your home to be proud of).
• You will now be paying property taxes on the value of the entire property.
• You will now have to get homeowner insurance to protect you from loss (requirement of having a mortgage)
• You will now have to repair, maintain, and replace ALL fixtures, appliances, heating-cooling equipment, plumbing, landscaping (lawnmower/shovel/snowblower/rakes and such equipment), floor coverings, windows, shingles/roof/eavestroughs, brick, siding, driveway, etc as they break down or experience wear and tear, dated or, or become obsolete. And if you fail to properly maintain your property, don't plan on the value appreciating as much as the real estate agent is boasting it will.

Don't have your head in the sand....really. Just don't bury your head and always ask are the expects having your best intentions at heart of ulterior motives in wanting to sell you a house. If you don't have the down payment, don't take a second mortgage out just because you want to own a home. It may sound good at the time but then you're also paying more interest and your monthly out of pocket expenses are higher.  Unfortunately,  home buyers failed to recognize that those experts do stand to gain so make sure you research and have the right team that will disclose to you the costs of home ownership and also disclose the right neighbourhoods that suit your needs. Ask questions and always trust your gut instinct (but that will be another blog one day)

The choice is yours, you can choose to ignore the costs of home ownership when contemplating a home purchase, or you can take painstaking steps to accurately forecast and budget for them now, while you can, in the save haven of your rental that you've already budgeted for. 

So, with that in mind, take a look at this Rent Vs Buy Mortgage Calculation on the image below. Calculations and values were entered to calculate and compare the cost of renting to the true cost of buying a home. It's not honestly all bad and yes, absolutely beneficial but IS IT RIGHT FOR YOU?

Let's say you pay $1100 per month and you stay in that home for 5 years.  You've spent $66,000

Now, let's pretend you were paying $1500 and that was a mortgage. If you put $500 away each month in the same amount of five years, that's $30,000 you could have saved. That's right. That's more than the minimum 5% required** (see note) for a down payment if you were to purchase a home for $250,000.  You can use that money to allocate for closing costs and/or use more towards a down payment to reduce your monthly mortgage amount or put that into a savings account for "a rainy day" and any unexpected maintenance costs.

**(downpayment definition:  A mortgage down payment is a specific sum of money deposited towards the purchase of a new home. It is not required in all cases, however, in the case that it is, there is a minimum amount required. This amount is relative to the value of the home you are looking to purchase. 

Note: the bigger your down payment is, the more affordable your mortgage loan will be. This is because a larger down payment results in smaller overall interest payments (a smaller loan). Down Payment Requirements For a Mortgage in Canada - Minimum Down Payment

For home buyers that are paid hourly or earn a regular salary, a minimum of 5% is required as the down payment for a home. For self employed home buyers a minimum of 10% is required to purchase a home. More could be required if your credit is poor (learn more about your credit score). Anyone choosing to put less than 20% of the value of the property as a down payment will be required to obtain CMHC (Canada Mortgage and Housing Corporation) mortgage default insurance. This protects the lender from losses in the event that you were to default on your mortgage.

Ok, don't want to overwhelm you. Not here to talk you into or out of buying. Again, just want you to make a well-informed decision because don't want you to be taken advantage of. The world is not all about Barbie's, sunshine and rainbows. Part 2 tomorrow


Happy New Year and happy new you!


sources: 
Mortgages Canada
Canada Revenue Agency


(The comments contained on this site are for information purposes only and do not constitute legal advice or intended to solicit anyone with any written agency agreement.)