The logic escapes me!
Ever since interest rates started rising, rent-2-own applications have gone down.
The reasoning seems to be that the higher payments required by those higher interest rates make it more challenging to afford a home.
That is, of course, true–for those people paying the mortgage.
But rent-2-own clients aren’t paying any mortgage until they exit the deal at the end of the term, a few years down the road.
When you’re in a rent-2-own property, the operator of the program is paying the mortgage, while helping you qualify for a new mortgage later. It’s when rates are low that we should be concerned because, if clients have been qualified for the rent 2 own based on low rates, then they may be in serious trouble should the rates rise before they need to get their own mortgage.
We’ve avoided this by always building a risk aversion factor into our qualifying criteria. When rates are low, they are likely to go up before the client completes the term.
When people complain that I’m qualifying them for a lower value than the banks would (currently) offer, it’s because of that risk-aversion factor. It’s saved more than a few clients.
Combine that with the fact that, when rates are low, house prices rise rapidly. It requires great caution in the buying process not to overspend so that, should rates rise and house prices drop (as they have in the last 10 months), the home will still have adequate value at the end of the term for the contracted purchase price.
So, the scary time to get into a rent 2 own program is when rates are low. But that’s when public interest seems to be the greatest, and applications plentiful.
Now we’re in the opposite situation.
Rates are high. They may have already peaked with the December rise, though some predict one more ¼-point rise. But that’s likely it.
They will almost certainly be considerably lower when you exit the rent-2-own program. And I’m not just speculating. 5-year fixed term mortgages at the banks have already started to decline from their peak. That makes it much safer to enter a rent 2 own program now than when rates were low.
Furthermore, because of the lower housing prices associated with higher rates, the reduced competition allows us not only to buy properties at a lower price-point, but also to bargain harder for a good deal. And with considerably more confidence that the value will be there at the end of the term.
It means that we can take most of the risk-aversion cautions out of our equation. While I used to have to qualify clients for maximum values somewhat below what the banks would, my formula is now actually a little higher than what you would get at the banks.
In short, while the banks’ criteria for getting a mortgage have changed greatly during this rate increase, our criteria for qualifying clients have changed only a little, because we’re much more confident about the future outcome.
The one caution I now build into the program is to avoid short-term deals at this time. We can be confident that rates will come back down, but we don’t know how quickly. So, we need to allow for plenty of time, to increase our clients’ chances of success.
This also helps the client because it means there is a longer period over which to accumulate the needed funds for the down payment, so there is a lower monthly financial commitment required.
So, to summarize:
Now is a pretty good time to get into rent 2 own because:
- property values are lower,
- there is a greater selection of properties available,
- interest rates will be coming down from their current peak before you need to be fully qualified,
- there is less risk of failure, and
- with longer-term rent 2 owns, the monthly payments are lower.
Did that analysis surprise you? Change you mind about rent 2 own in this environment?
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