Malcolm Morrison, The Canadian Press
TORONTO – Buying a house with a rental suite can be just the ticket to help you pay off your mortgage years earlier than it might have otherwise been possible.
But landlord beware: there are potential problems connected with getting financing, getting rid of tenants you really shouldn’t have let in in the first place and zoning issues.
The idea of having someone pay several hundreds dollars a month towards your mortgage might also entice you into buying a house you really can’t afford, and you could find yourself dangerously dependent on that rent money – experts will tell you this is a bad idea.
“I think leveraging yourself to a point where you are totally dependent on a tenancy and if you lose it, it could be extremely harsh on you,” said David Scarr of Royal LePage Westside in Vancouver.
Scarr said he is seeing the rental suite option become more popular, as house prices have surged in the last couple of years while mortgage rates resided at historic lows. At the same time, there has been a ready supply of tenants looking to find something decent below $1,000 a month.
“There’s always been an extreme shortage of good available (rental) stock, especially when you get students going to university, want to be close to a bus line or young people starting out in the workforce,” he said.
“They can’t pay the standard – right now in downtown you’re looking at a one-bedroom apartment probably for $1,400 a month for about 550 square feet.”
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.
“There’s always the issue of whether it’s legal or not legal. Most of them are not legal,” said Speer,
“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.”
Scarr agreed, adding that in Vancouver the blind eye is also turned very often since “the city is aware that they do not provide affordable housing stock so it’s something that the city does not act upon unless the space is horrible.”
“Generally speaking, we’ve turned a blind eye to unauthorized suites now for the last 15, 20 years,” he said.
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 travelled, 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.”
Garry Marr, Financial Post · Wednesday, May 5, 2010
How much protection do you really need? The latest prophylactic being sold to homeowners worried about getting caught with nasty high interest rates is something called the RateCapper from Royal Bank of Canada. It’s a product that offers you a variable rate that floats with prime, but guarantees your mortgage rate will not go beyond a certain point during the five-year term.
The price–there’s always a price — is that you give up the discount that you can negotiate off the prime rate.
National Bank of Canada has had a capped-rate mortgage product in the marketplace since March 2000. But trying to sell rate protection during a period of record-low interest rates would be as difficult as selling abstinence during the free-love 1960s.
“This product was not as popular [in the past couple of years] as it will be now,” says Jonathan Haziza, mortgage solutions product officer with National Bank of Canada.
With the National Bank’s Capped Rate product, for the term of your mortgage your rate can’t go above the five-year posted rate, now 6.25%, at the time you sign your mortgage. But instead of getting a variable-rate product as low as 1.75%, you are borrowing at 2.9% today.
I can just hear the conversation in the bank: “Honey, we’d better get some protection. We don’t want any nasty surprises, do we?”
But at what price that peace of mind? Mr. Haziza concedes National Bank is reconsidering its rates now that Royal Bank stepped in last week with the RateCapper.
The Royal Bank product, also for a five-year term, guarantees your rate cannot go above 5.875%, but allows consumers to borrow at prime, or 2.25% today. The price is not quite as steep as National Bank’s product, but consumers are still paying for it.
“It’s the best product in a rising-rate environment for consumers who can’t choose between fixed and variable,” says Anjel Van Damme, Royal’s director of home-equity financing products. “They get all the benefits of variables, but they know their price won’t go beyond a certain point.”
The bank protects itself from the possibility of rates skyrocketing through hedging. It should be noted consumers can exit the Royal Bank product with the usual variable-rate penalty of three months of payments, albeit based on the higher capped rate.
This type of product may become the latest craze, and there is nothing wrong with banks giving consumers options. But do you really want to take a pass on the almost-free money of this generation?
Rob McLister, editor of Canadian Mortgage Trends, says if you think rates are going to jump you should lock into a five-year fixed-rate product, which he says is still as low 4.35%.
“It’s a bad deal,” Mr. Mc-Lister says. “You are giving up quite a bit with these things.”
He adds that over the past decade, prime has averaged 4.81%, and 5.85% since 1991. Even if prime jumps by four percentage points, he says consumers would still be ahead with the variable option.
gmarr@nationalpost.com
Read more: http://www.financialpost.com/personal-finance/family/Rate+protection+comes+price/2987046/story.html#ixzz0sX9BbxRU
SUMMARY
Effective July 1, 2010, the Harmonized Sales Tax (HST) in Ontario and British Columbia will apply to residential home purchases from builders closing within 120 days. When completing these applications it is important to ensure the purchase price of the residential property includes the HST minus any applicable rebates.
While most builders include the HST, minus any applicable rebates in the purchase price, not all of them will do this. When the builder does not include the HST, it will result in an uncomfortable customer experience at closing as the customer may have a large outstanding HST amount included on their Statement of Adjustments.
ACTION
When completing a residential home purchase from a builder closing within 120 days, carefully review the Purchase Agreement to determine if the purchase price of the property includes or excludes the HST, minus any applicable rebates.
1. If the purchase price includes the HST, minus any applicable rebates, use the purchase price as stated on the Purchase Agreement.
2. If the purchase price excludes the HST and/or any applicable rebates, ask your customer to obtain an Amendment/Addendum from their builder reflecting a purchase price inclusive of the HST, minus any applicable rebates.
- · If an Amendment/Addendum is available, use the purchase price as stated on that document.
- · If an Amendment/Addendum is not available, manually calculate the purchase price to be used using the following guidelines:
- · Ontario – Guidelines
- · British Columbia –Guidelines
3. If your customer presents a separate agreement with builder upgrades that are apart from the original contract, use the purchase price of the property including the HST, minus any applicable rebates PLUS the cost of the upgrades, including the HST, minus any applicable rebates.
ADDITIONAL INFORMATION
- For questions specific to HST and Federal or Provincial New Housing Rebate eligibility, customers must contact their builder or solicitor directly.
· The CRA’s current policies regarding the application of the GST to housing generally applies to the HST. Similarly for rebate eligibility, the property must be the primary place of residence of the purchaser or a direct relation of the purchaser.
On Housing?
Buying a home is a significant expense. Some new homes in Ontario will cost more because of higher taxes resulting from the introduction of HST. Others will not. It will depend on the value of the home.
HST will apply to the sales price of all new homes in Ontario when it takes effect. But for homes that are priced up to $400,000, 75% of the provincial portion of the HST will be rebated to the builders, lowering the provincial portion of the HST to 2%. As a result, new homes valued at $400,000 or less will not be subject to higher taxes under HST.
However, buyers of higher priced new homes will be paying more in taxes. This is because there will be no change to the GST portion of the HST. Currently the GST is rebated in full on homes costing less than $350,000 and then partially rebated in decreasing amounts on homes selling for up to $400,000. But buyers of new homes valued at $400,000 currently pay the full 5% GST and will continue to once HST comes into effect.
So what does this mean for buyers of homes costing more than $400,000 once HST comes in? They will be charged provincial tax at two rates: 2% on the first $400,000 they pay for a new home and 8% on any amount above that.
There will be no HST on the resale of existing homes; but renovations will be taxable. The HST will also increase the cost of moving house and of living in a condominium. It will apply to monthly maintenance fees for condos, as well as to the cost of services tapped when buying and selling a home, such as legal advice, packing and moving household items, home inspection and professional real estate services (including closing costs and real estate agent commissions).
Buyers of new homes will receive a rebate of up to $24,000 regardless of the price of the new home.
- · Buyers of new residential rental properties will receive a similar rebate
- · The HST will not apply to purchases of resale homes
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On household maintenance costs?
Consumers should also be prepared to budget more for the natural gas and fuel oil they use to heat their homes, as well as the gasoline they use to drive their cars. These were previously exempt from the retail sales tax (but subject to the excise tax). The same tax increase will also apply to tobacco, but not to alcohol.
And there will be a new tax on taking a taxi.
On personal services?
Consumes will take an HST trim on their haircuts, manicures and hotels. However, some taxes can be avoided by buying now. For example, you can prepay your magazine subscriptions and funeral services before July 1, 2010, and not pay HST on them.
On household cash flow, tax credits and the economy?
The HST also represents a modest shift from taxing income to taxing consumption. That is the preferred option in economic debates, since income taxes discourage saving that could be used for investments that foster economic growth. Consumption taxes, by contrast, encourage saving, according to the pundits.
As a result, the Ontario government has already lowered the income tax rate applied to the first $37,000 of income, by 1 percentage point, from 6.05%. to 5.05%. This will reduce income taxes for 93% of Ontario taxpayers, the province estimates.
In addition, Ontario has beefed up the sales and property tax credit system, with singles making under $80,000 receiving three $100 tax credits in 2010 and 2011. Families making under $160,000 will receive a one-time $1,000 credit. After that, there will be a continuing annual $260 credit per person, similar to the GST credits that are already paid to lower-income earners.
Check out this chart for more information summarizing what’s taxable under the HST and what’s not.
