How you pay for your real estate can end up being the most interesting part
While housing options outside the standard real estate categories (single-family detached home, townhouse/condo, co-op) continue to be limited, the decidedly unsexy area of financing has, in recent years, become surprisingly diverse. Traditional avenues like banks and parents still dominate, but alternative choices are increasingly popular with new, first-time buyers. Here’s a look at five:
1. The Brokered Deal
Arranging and funding over $13 billion in mortgages last year alone, B.C. brokers play an important role in the local real estate market. Brokers—whose compensation is via lender commissions—have access to options not available to the average homebuyer, whether she decides to go through a financial institution directly or try to research the market on her own. Because of their relationships with a variety of lenders, brokers can negotiate a mortgage tailored to a buyer’s needs. “One of the biggest benefits to hiring a broker, says Ajai Soni, senior mortgage broker with Invis and president of the Mortgage Brokers Association of B.C., “is that a mortgage broker shops the market and makes sure the mortgage is the best fit for your particular situation.”
Often it’s the people without a good credit history who realize the greatest benefit in working with a broker. “Most of the time, this type of client will get declined at the major banks,” says Sherlock Yam, business development manager for the Win Lui Group, a Vancouver-based mortgage broker. “But we have access to credit unions, trust companies and other lenders that will approve these clients, through a type of lending often referred to as ‘alternate lending.’” With these agreements, mortgages are usually for a shorter term (i.e., one to two years), and lenders charge a higher rate and sometimes a fee, due to the high risk involved. Think of it as corrective surgery: once the credit is re-established, Yam says, the client can renegotiate the mortgage, this time with a major bank for the best rates.
2. The Mixed Mortgage
Despite recent media interest surrounding this type of arrangement, the mixed mortgage is not a new idea, says Ryan McKinley, mortgage development manager for Vancity. “People have always been able to co-own together—what we’ve tried to do is formalize [the process] so that people can co-own responsibly.”
While there’s no limit to how many people can be included in Vancity’s “Mixer Mortgage”—McKinley recently did one where eight couples bought a property together—usually it’s two couples or two individuals or parents and a child, he says. Mortgage terms can be negotiated for the agreement as a whole—or, if requested, Vancity will negotiate separately with each person or couple (for example, if there are two couples listed on the mortgage, one might have a variable rate over 20 years and the other, a fixed rate over a 30-year amortization).
Ultimately, however, as McKinley notes, “everyone is responsible for the overall debt, but this makes it easier psychologically to earmark what’s yours and what’s theirs.”
McKinley also thinks that part of the success of the “Mixer Mortgage” can be measured by the number of people who decide against it, after consulting various checklists and scenarios provided by the credit union. “We designed it so members understand exactly what they’re getting themselves into, and they have the conversation before they get into a co-ownership arrangement that isn’t actually going to work out for them.”
3. Rent to Own
Launched in the fall of last year, “Bosa-equity,” a program from one of B.C.’s best-known developers, is a new concept in the Lower Mainland rental market—and, according to Bosa Properties, unique in North America. It operates on the assumption that renters, in their move toward ownership, would appreciate a little help—and if that help comes from the landlord who’s cashing their rent cheques, so much the better.
According to Daryl Simpson, senior vice-president of Bosa Properties and Bluesky Properties (both part of the Robert Bosa Group), “tenants may not know what their rental plans are but knowing that they have this bonus waiting for them is often the difference between renting from us and renting from someone else—so we want to keep them in the family.”
Tenants living in any Bosa or Bluesky Properties rental building now have 15 per cent of their rent placed in a “Bosaequity” credit account, which can then be put toward a down payment for a new home that the company has developed (up to a maximum of three per cent of the value of the home, and within 24 months of their lease ending).
“The value of the rent is determined by the market,” Simpson says when asked if there is a rent premium to offset the Bosa rebate. “People who have been renting from us well before this program was in place are getting a 15 per cent credit on their market rent. Because we are a developer of market rental apartments that we retain ownership on and condominiums that we hope to sell to people, it’s a seamless transition or relationship.”
4. Laneway Living
When it comes to laneway homes, the City of Vancouver doesn’t permit stratification (buying and selling the laneway house independent of the principal residence), but formalizing the housing agreement through a mortgage agreement is allowed. In response to member requests, Vancity developed the “Laneway Mortgage”: a product unique to them, and one which formalizes an arrangement that is frequently arranged in the family but through the mortgage process allows a degree of separation.
5. Sharia Financing
Islamic financing—be it mortgages or other kinds of loans—is centred on the concept of sharia law, which forbids the payment or receipt of interest. In Canada, with its relatively small Muslim population, financial institutions’ interest in developing sharia banking is driven not by domestic demand as much as a desire to access the staggering wealth of the Gulf states, many of which complete deals requiring sharia financing.
According to a 2010 report commissioned by the Canadian Mortgage and Housing Corporation (CMHC), there are no legal roadblocks to banks including sharia-compliant mortgage products in their arsenals. However, the report goes on to state that the CMHC has no plans to insure sharia mortgages or change its current legislative or administrative practices, effectively relegating this type of mortgage product to small institutions, as major lenders would be hesitant to offer mortgages without CMHC insurance. Besides, say the report’s authors, the demand—even in countries with a Muslim majority—isn’t there: “The take-up rates for [Islamic financing] retail products is invariably extremely low, even in jurisdictions such as Malaysia and Pakistan where government support has been strong.”
While all the major Canadian banks offer some level of sharia-compliant investments—RBC and BMO have the largest operations, which exist primarily to service overseas clients—none offer sharia mortgages for the domestic market. With the 2011 bankruptcy of UM Financial, an Islamic financial company based in Toronto, Assiniboine Credit Union in Winnipeg—the ninth largest credit union in the country, in terms of assets—is currently the only sizable financial institution in Canada to offer sharia-compliant mortgages.