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A rental suite can help you pay off your mortgage but it could also turn into a nightmare if you become heavily dependent on that rent money and you have a mortgage on a house that you really can’t afford.
The rental suite option became more and more popular with the recent increases in house prices while mortgage rates remained at historic lows, combined with a large demand for accommodation below the $ 1,000 mark, especially among students going to university or young people starting out in the labor market.
By renting out a basement suite to a university student, you can charge enough rent so that after expenses, you can put some extra money towards your mortgage. The result is that you will pay off your mortgage in less years and in the process, save a large chunk in interest.
When you start number crunching to see if this makes financial sense, be aware that Canadian banks have toughened their standards for financing houses with a rental suite.
“Banks used to do a rent reduction, so that if you qualified to carry $1800 a month, and the tenant was carrying $500 and it was a legal unit, then they would take that amount off that you had qualified,” explained Diane Speer, of ReMax in Toronto.
“Or they would take some of the income and then discount, like if you’re getting $13,000 a year from a unit, they might add that into your income or take a percentage thereof. That’s constantly changing, too, the way they’re looking at it.”
“If it’s an illegal suite, you won’t get any break from the bank.”
And that brings up the issue of zoning: many rental suits in homes can be illegal, meaning the municipality hasn’t zoned a particular area for rental housing.
“But most neighbours will turn a blind eye because it’s been a way of living for so long a while and affordable housing is available in the neighbourhood. The only time I’ve really seen issues with them is somebody moved in who has three cars or somebody moved in who is an issue.”
Having decided that you really don’t mind sharing your house with a complete stranger, you will want to take extra care when holding auditions for your apartment and adopt more than a passing familiarity with provincial landlord-tenant legislation.
“A lot of people are so excited to get a tenant and get someone to pay that they’re not doing a credit check or not making sure on the application that the apartment is being rented to one person and not a family of six,” said Speer.
Speer observed that some of her clients will get in touch with the student housing office at local community colleges.
She has also done the landlord routine and said you just have to be smart about it.
“We were just always really cognizant of keeping the rent at an amount where we would get lots of applicants so that we could choose someone who we thought would be good, one person, a professional maybe who traveled, who wasn’t around,” said Speer,
“I think that if you don’t have standards there or do any kind of qualification or screening, it could be a nightmare and I’ve seen a lot of people go through it.”
Read more at:
http://ca.news.finance.yahoo.com
Contact us for more updated information on rental suites.
Patricia Lovett-Reid, senior vice-president at TD Waterhouse, has recently posted an article at the Financial post aptly titled “It may burst your bubble, but buy within your means“, in which she elaborates on the “importance of putting things into perspective” when assessing the “housing bubble”, using as an example her own daughter’s financial dilemmas.
The perspective she refers to comes from some statistical data, such as:
- Home prices across the country have grown at an average annual pace of 4.7% over the past 22 years, or just 2.4% per year above inflation.
- Residential home prices in places like the Greater Vancouver Area have appreciated by 54% over the past five years, over 9% a year compounded.
- In comparison, the average selling price in the Greater Toronto Area has risen at a compound rate of 5.2% per year over the same period.
Plus some added forecasts such as:
- After a 9% appreciation in average existing home prices in Canada in 2010, we could see a dip of 2.7% in 2011.
- Expect the Bank of Canada to raise rates from the current 0.5% to 1.5% by the end of 2010 and to 3% by 2011.
- An increase of variable mortgage rates along the way.
As she points out, today you can get a five-year fixed rate mortgage for approximately 4.6% (4.19% with the Mortgage Girl), and the closed five-year variable rate mortgage is approximately 2.35%.
Which leads us to the omnipresent question fixed or variable?
Her conclusions are as follows:
- The more stable your job, the higher the amount of equity in your home, the greater your financial liquidity and risk tolerance, the more suitable a variable mortgage may be for you.
- On the other hand, fixed rate mortgages offer you the peace of mind of a set rate and a predetermined amortization schedule. If you don’t like risk, then a fixed rate mortgage is for you.
Her final advice to her daughter: “Buy within your means because it is not worth the sleepless nights.”
But wait, there’s a third way that allows you to have the best of both worlds!.
Because you can actually take both! Look at the Mortgage Girl’s 50/50 Wise Mortgage product!
With this kind of Mortgage you are allowed to split your loan amount between fixed interest and variable interest rates. This means that regardless of the economic situation your loan will be partially suited to the economic circumstances.
Call now 1-866-932-8412 or e-mail: info@mortgagegirl.ca for more information.
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Time for a mortgage checkup?
While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or new-found money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
Canadian consumers tend to become complacent about their mortgage payments when they could be saving a lot of money. For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Using online tools, such as a mortgage calculator and a mortgage penalty calculator , you will know how much you can expect to pay to break your existing mortgage.
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes, such as going into a new venture or before retirement.
Read more: http://www.financialpost.com/