Helping Frustrated Renters Become HAPPY Homeowners
March 21, 2018
                            No. 237
How Will The New Federal Budget Affect Rent 2 Own?
Happy Spring Equinox!

Today, presumably, we all feel a little better about the coming months. We’re optimistic, because spring has finally arrived. Right?

 

Is it coincidence that the Trudeau Liberals presented their budget the day before the equinox—do it while everyone is feeling optimistic! And then add a little fuel to that optimism. Maybe people will overlook everything else.

The budget had some good news! There was a significant measure in it to help first-time homebuyers. Will it help you get into your own home? Now? Or after a stint in a Rent 2 own program?

First, the overview. If you’re a first-time homeowner, you will now be able to partner with CMHC, who will give you a loan of up to 10% of the value of the home at no interest on a new home. On used homes, it’s 5% of the value.

It means that the home-buyer will need 10% (or 5%) less of a mortgage than they would otherwise, which means a lower monthly payment. That’s good news for every first-time buyer.
Let’s look at some of the details. (Disclaimer: this is all so new that the details are sketchy, but this is as I understand them):

1. You still have to qualify for a mortgage in the normal way: you need the same good credit score, you need to have the minimum down payment (technically 5% but, for most people, 10%), and your debt ratio must remain within the acceptable limit.

2. The stress test that the government instituted several years ago, whereby you had to qualify for a mortgage 2% above the contracted interest rate, has not been removed.

3. Your mortgage cannot be more than 4 times your annual income.

4. Your income must not be greater than $120,000, nor your mortgage greater than $480,000, to qualify.

5. The loan from CMHC is not free money; it must be paid back on sale of the home.

What are the effects of this initiative? In part, it gives back some of what the government took away when they introduced the Stress test. When that came into effect, it effectively decreased the value of property one qualified for by about 20%. This new incentive effectively gives back either 10% or 5% of that value.

Let’s look at an example. If, before the stress test came into effect, you would have qualified for a property valued at $500,000, then, after it came in, you qualified for a property of only $400,000 value. If you qualified at the 5% down level, you would need a mortgage of $380,000. With this program, if this was a new house, then the government would add 10% of the home value ($40,000) by way of the CMHC loan, so you would need only a $340,000 mortgage to pay off. This could reduce the monthly payments (payments on a $340k mortgage being substantially less than on a $380k mortgage) OR, allow you to buy a $440,000 property because you already have qualified for that $380,000 mortgage, have paid $20,000 down, and the government will provide another 40,000. (Actually, it’s a little more complicated than that, but let’s simplify.)

But, here’s another likely effect: if people start taking advantage of this incentive it will heat up the housing market somewhat, at least in houses under $480,000, which means prices will go up, and the net benefit may be offset within a year or two. Bottom line: the early ones into the program will benefit most.

So, if you’re ready to jump onto it, go for it (well, as soon as they have the program actually up and running, anyway).

 

How might this affect rent 2 own?

First, we rarely work on the basis of qualifying at a 5% down payment level because it is too risky and we do not want to set up our clients for failure. So, we normally work on achieving a 10% down payment level by the end of the program. Second, we typically do not work with new homes, due to other complicating factors, so let’s consider that you will only benefit 5%, not 10% from this new program if you do a rent 2 own.

Still, it will help you. Like the government, our rule of thumb for qualifying people for rent 2 own was four times their gross annual income. This meant that, with a $100,000 income, for example, we could qualify you for a property valued at about $400,000. But, if you qualify under the new government program as a first-time homeowner, then even at the 5% loan-to-property value rate you will be able to get a further $20,000 for that purchase from the government when you close out your rent 2 own contract.

Therefore, we can now qualify you at 4.2 times your gross annual income (and, in rare cases, perhaps 4.4 times). It’s not the 5 times that we used to, but it’s helpful for those pushing their limits and finding few available properties at that level.

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Award-winning* Fraser Valley Rent 2 Own is a founding member of the Canadian Association of Rent to Own Professionals (www.CAROP.ca)
* winner of all-star awards, 2012, 2014, 2015 at the Rent 2 Own Summit.
Quote of the Week:He who is satisfied with what he has, is a rich man.― Nabil N. Jamal
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