rent to own

Why Rent to Own?

Excellent question! Rent to Own is an excellent program that was developed to help individuals like yourself that may not be able to qualify for a conventional mortgage today. There could be several reasons for why you may not be able to qualify for a mortgage, but the most common reasons are low or bad credit, not enough money for a down payment, haven’t had steady income for 2 or more years, etc. Not to worry, because we can help!

Rent to Own is a program that gets you ready to be qualified for a conventional mortgage, while holding the price of the home for you until we get all your affairs in order. The terms range from 2-4 years ideally, but can go up to 5 years if needed. Throughout the term, your rent does not increase, your landlord will never decide to sell or displace you, you have the luxury of treating the home like your own, you have the freedom to decorate the home, to have pets, to sub-lease or rent the basement, and to make any changes that will increase the value of the home.

Below are a few differences between renting and Rent to Own

 

Rent

Rent to Own

Rent Increases

YesNo
PetsNo

Yes

Landlord can sell

YesNo
Permission for small changesYes

No

Sub-lease or Sub-letNo

Yes

Changes for improvementNo

Yes

Now, imagine for a second that you are paying $2000/month in Rent. In 3 years, you have basically paid over $72,000 in Rent without getting anything back. I say over $72,000 because the Rent generally goes up every year. $72,000 is a very large amount to have wasted away, without any sort of return or appreciation on this money.

With Rent to Own, you lock in the agreed upon price today, so when the market value for the property goes up in 2-4 years, the appreciation is your profit. It’s basically equity that gets built into the home, and you are eligible for that appreciation 100%!

Imagine, someone gave you an opportunity to buy a house today, with what it was valued 3 years ago….would you say that’s an unbelievable deal? That’s exactly the option that Rent to Own provides you!

The qualification is easy, we look at 3 different things: Income, Credit and Down Payment.

For the process to work flawlessly, you need a minimum of 4%-5% as a down payment of the property value. Meaning, if a property is valued at $300,000, then you will need around $15,000 as a down payment. The reason we ask for this down payment is simple, we want to qualify you for a mortgage at the end of the term. Simply put, you cannot buy a house with 0 down! You can’t even buy a pair of shoes with $0, and this is a home we are talking about…one of the BIGGEST investments of your life!

With the initial 5% put into the property, we save a portion of the rent that you pay every month and put it towards building a bigger down payment. Our goal is to get you as close to 10% of the property value as a down payment, so that we can qualify you for a conventional mortgage. Simple!

As far as credit, even if you have no credit, bad credit or okay credit…we provide a full credit assessment with a customized credit mentoring program and continued and on-going credit coaching. All of this is free of cost to you!

Ready to get started? Perfect! Call us right now and let’s set up an appointment to meet!

 

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Rent or buy? How home prices and high rents affect that equation

The volume of home sales in April touched a seven-year low for the month, the Canadian Real Estate Association said on Tuesday. And home prices in most markets are stagnating.

But if Canada no longer looks like a sellers’ market, buying a home hasn’t exactly become a cakewalk. Unless you’re shopping for a detached house in the country’s two priciest cities, you probably haven’t seen home prices decline.

Renting isn’t cheap either. Forty per cent of the 4.4-million Canadians who have a landlord rather than a mortgage spend over 30 per cent of their pre-tax income to keep a roof over their heads. And things could get worse if rising interest rates and tougher mortgage rules force more Canadians into the rental market.

So, what’s the least bad option in this era of stalling home values and sky-high rents: being a tenant or a homeowner?

Common wisdom has it both ways when it comes to the rent vs. buy question. Many people argue that renting is a waste of money: You’re not building equity in your home and your housing costs will never go down.

Others argue that since rent is usually much cheaper than the carrying costs of owning a comparable home, you can build wealth by investing what you’re saving by not having to pay for things like property taxes and home insurance.

Unfortunately, both arguments can be wrong, depending on your individual situation and the conditions of the market. Crunching some numbers will usually give you a better idea of what renting or buying entail in your specific case.

Rent or buy? The case of a Toronto semi

Toronto is a great place to test the rent vs. buy math. When it comes to larger and more expensive homes, the real-estate craze of the past couple of years has dissipated. At the same time, rents are among the highest in the country.

Let’s look at the example of a three-bedroom, two-bathroom semidetached house, what many would call “a starter home.”

According to data provided to Global News by Toronto real estate website Bungol.ca, the average asking price for such a home in the Greater Toronto Area (GTA) is around $744,000. With a 20 per cent down payment of $148,800, and a five-year fixed rate mortgage of 3.49 per cent, the monthly mortgage payment would be $2,969, according to the online mortgage calculator provided by rate-comparison site RateHub. Add in property taxes, home insurance, utilities and home maintenance costs, and you’re looking at spending $3,800 a month at least.

On the other hand, the average rent for a comparable property is around $2,450 a month in the GTA, according to Bungol. That’s a difference of a whopping $1,350 in monthly costs compared to being a homeowner.

But what does that mean?

Global News run the numbers through the online “rent vs. buy calculator” provided by The Measure of a Plan, a Canadian financial planning site. If you assume that home prices will stay relatively flat for the next 25 years, it doesn’t make much of a difference whether you rent or buy that Toronto semi.

A tenant with an initial investment portfolio of $151,800, equivalent to what the buyer would likely spend on the down payment and purchase transaction costs, would end up with around $1.35 million 25 years down the line, assuming an annual return on investment of 5.5 per cent before inflation.

The homebuyer would end up with roughly that amount in home equity.

Rent or buy? The case of a Toronto condo

When you look at small condos in Toronto right now, those who can afford to buy still seem to have a clear advantage.

The average list price for a two-bed, one-bath apartment in the GTA is around $412,000, according to Bungol, which works out to roughly $2,000 in mortgage payments and $2,650 in carrying costs. Renting a comparable unit, on the other hand, will cost you around $2,330 a month. That’s a mere $320 difference in monthly carrying costs.

Even “a conservative 2 per cent annual property appreciation assumption results in almost $700 of gain per month, over time. That’s quite a bit more than [the] rental savings,” said Robert McLister, founder of rate-comparison site RateSpy.com and mortgage planner at intelliMortgage.com

“In most urban markets, it’s hard to beat buying long-term when your rent payment is higher than your mortgage payment for the same property,” he added in an email to Global News.

WATCH: Here’s what millennials couples can afford under the new mortgage rules

But small towns where few homes are available for lease can also be a tough market for renters, said Jason Heath, a fee-for-service financial planner and managing director at Markham, Ont.-based Objective Financial Partners.

In communities where the supply of rental properties is limited, it’s not uncommon to see yearly rent payments equivalent to between 7 and 10 per cent of the market value of a comparable home.

Generally, if a year’s worth of rent adds up to less than 4 per cent of the market value of a similar house, you’re probably looking at a renters’ market. If yearly rent works out to 5 per cent or more, buying is more likely to be the better option financially, Heath said.

Still, there are all sorts of variables that can skew the calculation. For example, the faster home prices rise, the harder it is for renters’ investment returns to keep up.

On the other hand, you won’t be building much wealth as a homeowner if you keep tapping into your home equity to borrow, Heath noted.

And if you have a generous workplace pension with your employer matching contributions, renting and being able to make larger monthly deposits into your retirement savings account might make more sense, Heath added.

The 4-per cent rule of thumb is only a starting point, he said.

“It’s important just to know when to ask more questions.”

Source: https://globalnews.ca/news/4206474/rent-vs-buy-canada-2018/

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Home Sales Jump 30% in May 2018

GTA home sales grew 30 per cent from April 1-15 to May 1-15, according to data from a report.

Condo sales are particularly high, rising 48 per cent month-over-month for the first two weeks of the month. In comparison, detached homes saw a 21 per cent month-over-month increase.

The GTA housing market has remained relatively cool so far this spring, activity could be starting to heat up in May.

 

The market continues to be a cool relative to last year, as both sales and new listings are down from 2017’s record heights.

“In the [GTA], the sales-to-new-listings ratio increased from 35 per cent last month to 39, reflecting continued, though slightly tighter, buyers market conditions,” reads the report. “However, in the city proper, the ratio rose from 38 per cent to 45, making the move from a buyers’ market to balanced.”

A ratio of between 40 to 60 per cent is considered balanced, with readings above and below indicating buyers and sellers markets, respectively.

The report uncovered a more subtle sign that the market could be warning — early indications that bidding wars could be starting across Toronto.

“As spring sales start to increase, terminology found in MLS listings reveals that bidding wars in the 416 region have returned,” reads the report. “A query for common terms which usually indicated bidding wars are expected, reveals 197 active Toronto house listings including the wording ‘acting offers’ and 209 with ‘register by.’”

Earlier this month, Toronto Real Estate Board president Tim Syrianos predicted that the market would begin to see an uptick in activity heading into the summer months.

“A strong and diverse labour market and continued population growth based on immigration should continue to underpin long-term home price appreciation,” he wrote, in a statement.

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Toronto sees a surge in purpose-built rental development

After decades of slow or almost no growth in new purpose-built rental construction, the Greater Toronto Area may be in the middle of a mini-surge as a range different players are finding creative ways to keep some of the region’s land from turning into another new condominium.

With one of the tightest rental markets in the country, one of the most expensive home ownership markets and a booming population, it should be no surprise that the Toronto region has pent-up demand for rentals. What’s new is that the math for builders is finally starting to make sense to build new rental – particularly in the luxury and premium rental market – which is leading to an uptick in supply in levels not seen since the mid-1990s.

According to data from real estate analysts Urbanation Inc., six projects and 1,723 units began occupying in 2017, but it projects that in 2018 nine projects equalling 2,669 units will be delivered.

There are also 162 proposed rental projects across the GTA, which could add up to 34,054 units. Of that, approximately 27,000 are in city of Toronto, and almost 17,000 are even more centrally located in the boundaries of the old city of Toronto.

The region never stopped building rental housing, but as a 2017 Ryerson City Building Institute report noted, its only in the past two years that the market has seen more than 2,000 rental construction starts per annum since 1994.

“New market rental is badly needed in the downtown,” said Cary Green, chairman of Greenwin Inc., which just announced that it won a request-for-proposal to build 700 units of rental as part of the Provincial Affordable Housing Lands Program in exchange for keeping 30 per cent of the building affordable for 40 years. The site, near Bay and College, is the kind of downtown land the company could only dream of acquiring in the open market. “It’s very challenging today – we’re competing with the condo market. They can pay more money for the land than the rental market has been able to in the past,” Mr. Green said.

The competition between condos and renters for land is why some of Canada’s biggest pension funds and insurers are teaming up with the the region’s biggest landlords to squeeze new rental buildings onto their existing properties.

“Up until the mid-2000s, a lot of the landlords or owners would grow by purchasing existing rental assets,” said Drew Sinclair, Principal at SvN Architects and Planners. “Now, the cost of building is less than the cost of buying. That’s a really dramatic transition.”

Earlier this year, Minto Capital, a part of the builder and landlord Minto Group, announced one its first new-build rental buildings in years was nearing completion in Oakville: 1235 Marlborough is a 14-storey tower on the grounds of its existing Marlborough complex in the College Park neighbourhood at Trafalgar and Upper Middle Road.

“We’re catering to two markets: students with a roommate or downsizers that are coming from larger homes and can’t envision their lives shrinking into a one bedroom,” said Ben Mullen, vice-president of asset management, who said the building has 144 units, 97 of which are two-bedroom (starting at $1,675 a month) and 46 are three-bedrooms (starting at closer to $2,000).

Mr. Mullen said that major landlords such as Minto have two options to increase the value of their portfolios: “reorientation,” which means renovating old buildings with more attractive modern amenities to enable charging higher rents; or intensification, which means squeezing a new building onto the existing land, which also lets it charge higher rents. “We are seeking rents that are greater than our existing building,” he said. “ This is the only one that would fit at Marlborough. We have a couple other we’re working on in the GTA that are very similar.”

Mr. Sinclair, whose firm has consulted on planning and design for many of these landlord companies, said there are 2,700 high-rise apartment buildings in the city of Toronto alone, the majority of which are “tower in the park” configurations ripe for intensification. “There’s a huge amount of potential for a significant amount of rental housing to come online,” he said.

But the ability to charge premium rents in the GTA is also what’s drawing in new players, such as condominium builders Camrost Felcorp Inc., which added a luxury rental building – 101 St. Clair – to its redevelopment of the Imperial Oil headquarters.

The market they are after is “that Forest Hill homeowner who doesn’t quite want to make the full commitment. 101 St. Clair is the toe in the water to see if this lifestyle is right for them,” said Joseph Feldman, director of development at Camrost. He said 101 St. Clair is about 50-per-cent leased, but while one-bedroom suites start at $2,295 a month, some of the larger 1,500 or 2,000 square foot units hit $5,500, or even $20,000 a month for its highest-end pads.

“We are hot on the market, we believe, in the product that we build. We’re on the verge of pulling the trigger on another purpose-built [in the company’s new community in Leaside], “ he said. “The joke in our office is that in the past 41 years we’ve built 11,000 units – imagine if we kept all of those as rentals.”

While it might not seem like high-end units perform a useful role in solving the affordability issues that rental usually addresses, Altus Group chief economist Peter Norman suggests a different way to think about it. “The city itself is 650,000 units strong. That’s the size of the rental stock in the GTA. If you don’t provide at the high end, it’s a cork in the bottle; nobody can move up.”

That said, the luxury market might not be able to address the growing region’s needs.

“If we’re starting to build more housing, more rental, there is a bigger opportunity there than if we’re just focusing on the luxury market,” said Graham Haines, research and policy manager for the Ryerson City Building Institute, one of the authors of a report that suggested the GTA needs to add 8,000 new purpose-built rental units a year until 2041 to keep up with population demand. If the majority of new rental units go for premium rates, “Obviously, our lowest income people are pushed further and further down the property ladder,” Mr. Haines said.

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BMO latest Canadian bank to hike mortgage rates

Bank of Montreal has raised rates on its posted mortgages, joining a number of other Canadian big banks as they respond to rising bond yields.

Effective Thursday, BMO raised the rate on its five-year fixed mortgage to 5.19 per cent from 5.14 per cent.

But rates on its entire slate of fixed-rate mortgages also rose. For example, the rate for a one-year mortgage rose to 3.44 per cent from 3.29 per cent – an increase of 15 basis points. The rate for a 10-year mortgage rose to 6.5 per cent from 6.3 per cent.

The changes were initially reported by RateSpy. BMO confirmed the moves.

While home buyers can usually negotiate rates that are lower than the banks’ posted rates, the changes nonetheless highlight the fact that borrowing costs are rising as markets respond to a confluence of changes: Global economic growth is picking up steam, inflationary pressures are building and central banks are raising interest rates.

Although both the Bank of Canada and the U.S. Federal Reserve held their respective rates unchanged at their latest monetary policy meetings, financial markets expect rate hikes later this year.

The changes from BMO follow similar changes at four of Canada’s biggest banks, after Toronto-Dominion Bank led the pack with rate increases last week, followed closely by Royal Bank of Canada, National Bank of Canada and Canadian Imperial Bank of Commerce.

Rising posted rates come at a time when Canada’s housing market is adapting to regulatory changes designed to slow home-price appreciation in particularly hot markets – notably Toronto and Vancouver. Among these changes are stress tests, designed to ensure that home buyers can handle payments if mortgage rates rise by 2 percentage points, potentially making it more difficult for cash-strapped or indebted Canadians to buy homes.

The changes may be showing up in home-buying activity. Sales data from the Toronto Real Estate Board (TREB) showed home prices in the Greater Toronto Area in April were relatively unchanged from March, but are down 12 per cent from last year. In Vancouver, residential sales last month fell to their lowest level in 17 years.

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A mortgage can be painful but For the wealthy, it’s a money-making tool

Canadians typically consider mortgages as a burden, to be paid down as quickly as possible, or at least before retirement.

It may seem counter-intuitive, but for the wealthy, mortgages are a tool to make more money.

Carrying a mortgage when you don’t need one might seem like a head-scratcher. Why borrow when you’ve already got plenty of funds at hand?

But as F. Scott Fitzgerald purportedly once said, “The rich are different from you and me.”

Wealthy people take out mortgages against their real estate holdings and use the money to invest.

JGARERI/ISTOCKPHOTO

It sometimes makes sense for high-net-worth people to take on new debt, says James Robinson, mortgage agent at Dominion Lending Centres in Toronto.

“Using your real estate holdings to borrow money for investment purposes – either your principal residence or any other investment or personal-use property – falls under the ‘wealthy people become wealthy by using other people’s money’ category,’” Mr. Robinson says.

“If you can invest at a higher rate of return than you can borrow, you will increase your wealth and, therefore, your net worth.”

There are also tax advantages, though Mr. Robinson advises investors to seek professional advice about tax implications. In Canada, mortgage interest is not tax deductible; however, the interest paid on funds borrowed for investment is, so borrowing has to be structured carefully to avoid running afoul of the Canada Revenue Agency.

Remortgaging or taking a line of credit secured against property can also be advantageous for investors who are affluent but don’t quite reach the high-net-worth (HNW) category.

Financial institutions generally consider HNWs to be people with $1-million in liquid assets, while those with $100,000 to $1-million are considered “affluent” or “sub-HNW.”

One reason that HNW clients can consider taking on a mortgage is that “normally, they’re the ones who have access to assets for security [their houses and other properties] as well as the income required to service the debt,” says Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont.

For those who are barely at the HNW threshold but want to boost their investable assets, “unless you can obtain a preferred rate from your lender, using secured debt is the only advisable way to borrow to invest,” Mr. Shelestowsky says.

Mr. Robinson cites several good ways to borrow to invest.

“The most common strategy used is to simply refinance your principal residence to access some of the equity you have built up over the years, and use the additional funds to purchase an investment property,” he says.

Wealthy borrowers who refinance in this way increase their asset base through leveraging, but this also is contingent on the value of real estate going up, Mr. Robinson adds.

“If you own $600,000 worth of real estate and prices rise by 5 per cent, you have increased your worth by $30,000. If you leverage and now own $1.2 million worth of real estate and prices rise by 5 per cent, you have increased your worth by $60,000.”

What could possibly go wrong? A few big things, the experts say.

For one, it’s never certain that the value of real estate will rise. There’s always the risk that you will be paying off a mortgage on a property whose value is drifting sideways, or even dropping. This could be happening, too, as your market investments are nosediving.

“Remember that when you leverage and asset values fall, the same multiplying effect occurs in the opposite direction. Don’t get caught in a get-poor-quick scheme,” Mr. Robinson says.

Real estate values do tend to go up over time, but it is not a straight line, he adds. In Ontario and other parts of Canada, the years from 1989 to 1996 were brutal for real estate values.

Debt-holders must be patient, says Andrea Thompson, senior financial planner with Coleman Wealth, part of Raymond James Ltd. in Toronto. “Investors must be able and willing to sit with a paper loss and continue to collect the monthly income, rather than panic and sell at a loss.”

Investors considering taking a mortgage should also be mindful of rising interest rates. The Bank of Canada is holding the line on rates for now, but it has hiked its key lending rate three times since last July, Ms. Thompson says.

High-net-worth borrowers also should consider the type of mortgage. “Looking at a variable rate or open mortgage might be preferable to some who want more flexibility, if they want to collapse or modify their strategy if and when interest rates rise,” Ms. Thompson says.

A different way to go, Mr. Robinson says, is to take what some lenders now offer as an “all in one” borrowing product, secured by real estate.

“This combines a mortgage with a home equity line of credit to allow you excellent flexibility in your borrowing as well as the ability to keep your borrowing segmented for interest calculation and tax deductability,” he explains.

Even the wealthy should be cautious in this volatile investment climate, Mr. Shelestowsky says.

“An overarching theme from the investment world is ‘lowered return expectations’ going forward,” he says. “Target expectations have been drastically reduced across all investor profiles.”

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Canada Not Alone in House Price Mania

The dramatic rise in Canadian house prices has been making headlines almost daily.

And for good reason: prices in and around the country’s hottest markets, Toronto (and until recently) Vancouver, have been posting double-digit annual gains. In May, prices in Toronto and Vancouver were up year-over-year 29% and 8.8% respectively.

But Canada isn’t the only country experiencing skyrocketing home prices.

Here’s a look at some of the gains over the last four years around the world (data compiled by The Economist):

  • 66% in Australia (+2.1% in the past year)
  • 30% in Britain (+6.3% in the past year)
  • 102% in Canada (+10.5% in the past year)
  • 44% in China (6.2% in the past year)
  • 61% in Israel (+9% in the past year)
  • 132% in New Zealand (+12.2% in the past year)
  • 115% in Sweden (+3.6% in the past year)
  • Even U.S. home prices have largely recovered to post-financial crisis highs. They’re up 10% from 2012, and up 4.8% over the past year.

But the two hottest housing markets are currently Iceland and Hong Kong, which posted annual price increases in Q1 of 17.8% and 14.4%, respectively, according to Knight Frank’s Global House Price Index.

Since 2015, prices in Hong Kong have risen a whopping 236%. If you think Toronto prices are bad, those desperate for a slice of the real estate market in Hong Kong are now paying upwards of US$500,000 for “micro apartments” that measure no more than 161 square feet—just barely large enough to contain a Tesla Model X, as reported by Bloomberg.

Following Iceland and Hong Kong in the 55-market house price index is New Zealand in third spot and Canada, currently ranked as the world’s fourth-hottest housing market.

Signs are also appearing that other European markets are starting to pick up steam as well. Research firm Global Property Guide reported that in 2016, 18 of the 23 European housing markets that it tracks posted price increases, with some of the strongest gains in Iceland, Ireland (+8%), Romania (+11%), Estonia (+7.4%), and Germany (+6.9%).

Increases Largely Isolated to Major Cities

Not surprisingly, the largest price gains—in Canada and around the world—are predominantly restricted to the largest cities.

Over the past four years, prices are up 47% in Vancouver, 54% in London, UK, and 75% in Auckland, New Zealand.

International Monetary Fund (IMF) data shows that in Canada, home prices at the national level are about 13% lower compared to the major cities. The difference is even more pronounced in the UK, U.S., New Zealand and particularly in China, where average national home prices are 55% cheaper than in the major cities.

The IMF tracks housing markets in 57 countries and reports its findings in its quarterly Global Housing Watch. The economies are divided into three categories:

“Gloom” – Those where house prices fell substantially during the financial crisis of 2008-09 and have yet to make a turnaround (Brazil, China, Russia, Spain);

“Bust and boom” – Countries that have seen their prices rebound after falling sharply during the financial crisis (Germany, Ireland, Japan, New Zealand, UK, U.S.); and

“Boom” – Countries that saw only a modest drop in home prices through the financial crisis, followed by a quick rebound (Australia, Austria, Mexico, Sweden, Switzerland).

Unsurprisingly, Canada finds itself among the 22 “boom” economies, and has been on the IMF’s radar as prices continue to soar higher.

IMF’s Eye on Canada

In a previous report from June 2016, the IMF commented specifically on Canada’s housing market and its level of risk at that time: “Macroprudential policy has been broadly effective in alleviating financial stability risks and reducing tax payer exposure to mortgage finance. Additional macroprudential measures may be needed if housing market vulnerabilities intensify.”

Fast-forward to October 2016 when the Department of Finance did just that and introduced its new mortgage rules, which expanded mortgage stress testing requirements and imposed new restrictions on mortgage insurance.

With home prices in the Greater Toronto Area and Greater Vancouver Areas continuing to rise through the early part of the year (more so in Toronto following Vancouver’s introduction of a 15% foreign buyer’s tax), a new IMF report in May sounded yet another warning:

“(Canada’s) $1.5 trillion mortgage market has been important in sustaining private consumption but households are highly indebted and housing affordability, particularly in Vancouver and Toronto, has become a social issue with many first-time buyers priced out of the markets,” read the IMF report. “Credit ratings of Canada’s six largest banks were lowered recently, reflecting concern that high household debt and the rapid appreciation of house prices could weaken asset quality in the future.”

And back in January the Organisation for Economic Co-operation and Development (OECD) had also commented on the growing risks associated with Canada’s rising home prices.

Catherine Mann, the OECD’s chief economist, said a “number of countries,” including Canada and Sweden, had “very high” commercial and residential property prices that were “not consistent with a stable real estate market.”

Stepping Back from the Doom and Gloom

Despite the rapid increases in global house price, at least one top economist says that in itself isn’t cause for automatic alarm about another global financial crisis.

“This is a time for vigilance, but not panic,” Prakash Loungani, a member of International Monetary Fund’s research department, wrote in a blog post.

He and colleague Hites Ahir argue that the dynamics are different from the housing boom of the 2000s for two reasons:

  1. The current rise in house prices is not synchronized across countries. “And within countries, the boom is often restricted to one or a few cities. In many cases, the booms are not being driven by strong credit growth: some house price increases, particularly at the city level, are due to supply constraints.”
  2. Governments are now more active in using “macroprudential policies to tame housing booms.”

In its own report on the Canadian housing market, Fitch Ratings, while acknowledging the increasing vulnerability to a steep price correction, said there are key “structural features” that would safeguard a housing crisis like that seen in the U.S.

“Canada is unlikely to mirror the declines and fallout experienced during the U.S. housing crisis due to major differences in the housing and mortgage finance systems,” said Fitch Director Kate Lin, noting that banks are subject to rigorous oversight and regulations that ensure prudent mortgage lending and underwriting standards.

“What’s more, credit quality for Canadian mortgage loans remains strong unlike the drift towards weak borrower and loan quality that we saw a decade ago in the U.S.,” she said.

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When Interest Rates Inevitably Rise…

In a new report on “household indebtedness and financial vulnerability,” the Parliamentary Budget Office (“PBO”) has provided calculations on how increased interest rates would affect debt service costs for Canadian consumers.

The PBO report assumes that the effective mortgage interest rate would rise from 2.9% as of Q1-2017 to 4.8% by the end of 2021 and the average rate on non-mortgage debt would rise from 5.4% to 7.6% over the same period.

In the PBO scenario, the overall debt service ratio of Canadian consumers would rise from 14.2% to 16.3% (expressed as a percentage of personal disposable income). This would be a severe increase in debt service costs (it would exceed the highest level that has been seen in the past 27 years, which was 14.9% for just one quarter in 2007).

If this scenario of a rise in interest rates (by about two percentage points) comes to pass and ifthere are no mitigating factors, this outcome would indeed be quite challenging to many consumers and it could very well impair the broader economy. Yet, these two ifs provide two important caveats for understanding the PBO report.

Just One of Many Possible Scenarios

The PBO report considers just one scenario, in which interest rates rise quite sharply. Since there is just one scenario, it looks like a forecast, which makes it tempting to see this as an event that is highly likely to occur. In reality, this is a “what-if” exploration, and not an event that is guaranteed to occur. There are many other possible scenarios that would yield different estimates of impacts.

I have two ways of looking at the PBO’s scenario for interest rates.

The first is that it looks a great deal like the interest rate forecasts that have been published by the major banks during the past decade: repeatedly, those forecasts have pointed to increases of about 1.5 to 2 points during the coming 1.5 to 2 years. Although they have been consistently wrong so far, their forecasts are still following that pattern.

The second is that the PBO has not produced a strong argument for its forecast: “the Government of Canada 10-year benchmark bond rate was projected to increase from 1.7% to its long-run level of 4.0% by the end of 2021.” They seem to be making a “reversion-to-the-mean” argument, which is a last-resort argument that some analysts make when they can’t come up with a real argument. In a different PBO report on the economic and fiscal outlook, there is commentary that “we have also revised upward our outlook for Canadian long-term interest rates, reflecting higher-than-anticipated U.S. long-term rates.” There is certainly no argument within the PBO reports that supports the large magnitude of the expected rise in interest rates.

As an alternative argument I propose:

  • The Canadian economy has been muddling-through since the recession.
  • Following an extended period of exceptionally low interest rates, there is no evidence of incipient pressures for reflation.
  • Economic indicators have strengthened during the past year, and there may now (or in the near future) be some room for moderate increases in interest rates, to forestall future inflation.
  • But, any sharp rise in interest rates, such as the PBO scenario, would dampen consumer spending and business investment, especially in relation to home buying as well as investment in new buildings (residential and non-residential), which would impair the broader economy.
  • It seems most likely to me that even if rates increased substantially, the increases could not persist, and thus a realistic scenario for sustained higher interest rates should be less severe than is assumed by the PBO.

Two Big Mitigating Factors

The data used by the PBO on debt service costs is “obligated” payments ¾ for mortgages, the payments required based on the contracted amortization periods, and for other debts, the minimum monthly payments.

But, we know that most mortgage borrowers pay more than they are required to: Mortgage Professionals Canada’s fall 2016 report on the residential mortgage market estimated that Canadians are making actual mortgage payments totalling $105 billion per year. By contrast the data used by CBO assumes that they are obligated to pay $76 billion. The difference of almost $30 billion is voluntary excess payments. This gives the mortgage borrowers a huge amount of room to make adjustments in the event that higher interest rates result in increased obligated payments. In fact, this $30-billion cushion is enough to accommodate the PBO scenario: even if required payments increased by the amount the PBO assumes, the current actual level of actual payments is sufficient (in aggregate) to meet those obligations.

The second mitigating factor is that at today’s low interest rates, mortgage principals are being repaid very rapidly. In the borrower’s first payment, more than one-half is principal repayment. During the first five-year term of a 25-year mortgage, about 15% of the principal will be repaid (if only the minimum required payments are made). In the event that a renewing borrower is unable to afford a higher interest rate, there should be room to reschedule payments, as an alternative to default.

To conclude, yes, it is true that interest rates may be higher in the future. Yet, it seems unlikely that the increases in interest rates will be anywhere near as large as is assumed by the PBO scenario of a 4.9% mortgage interest rate (as well as by the mortgage insurance stress test, at 4.64%). We don’t know what will happen to interest rates. But, we do know that there is a great deal of resilience within consumers’ financial situations.

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Did You Know About Rent To Own Home in Toronto And Its Benefits?

Rent to own home is a unique concept of making use of a property of your desire. It is the concept of leasing that binds rent to own homes. Rent to own home may seem very much like mortgage agreements, but they are different in principals from mortgage agreements. Rent to own home Toronto is the most suitable to people who are in need of a house with little finances compared to the purchase price of the property. In a rent to own home Toronto setting, you only have to pay a little percentage of the total cash price of the property you are about to lease. It is the down payment and is generally around 20% of the total cash price.

How A Rent To Own Home Toronto Deal Works

You sign an agreement with the owner of the property who is also called the Lessor. The agreement includes all the terms and conditions such as the term of the lease, the down payment, the periodical payment and the terms of non-payment or default of payment by the lessee. The lessee is the person who is opting for the rent to own home property. You can move into the property right after the agreement is signed between you and the lessor. The ownership of the house passes to you only at the payment of the last instalment, unlike in a mortgage.

The unique feature of the rent to own home Toronto contract is that you have the option of opting out of the deal. It means you can reside at the property for a tenure you wish to and can decide if you really want to purchase the house because there are many chances where you may first want to know if the property is suitable for you in various criteria.

A rent to own home Toronto offers you many benefits than other forms of purchasing properties. It involves less initial investment from your side. You are allowed to move into the house as soon as you enter into the deal. It has much lesser formalities than a mortgage transaction. It is a win-win for both the lessor and the lessee. Most importantly you are free from the market price fluctuations of the property as the cash price of the property is set in the initial terms of the rent to own home deal.

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