Trading Equity for Home Ownership
September 12, 2019
Trading Equity for Home Ownership – Housing affordability in major urban cities has been a major concern for several years. Those looking to buy a home or condominium are often struggling to come up with the down payment and usually resort to borrowing money for the “bank of mom and dad” or forgo purchasing all together. There is an alternative.
Options for Homes is a nonprofit housing developer in the Greater Toronto Area that contributes to homeowners’ down payments.
The way the system works is the affordable housing developer will contribute up to 15% of the down payment with the buyer putting in the other 5%. In return, Options will receive a portion of the equity when it is eventually sold. The additional funding allows home buyers to put a larger down payment than they would otherwise be able to afford, further lowering their monthly carrying costs. At Options, the funding is available to anyone that qualifies for a mortgage from a primary lender, regardless of income and repayment isn’t required until the home is sold.
In a shared equity mortgage, the buyer maintains ownership while the lender takes a stake in the property. If the property increases in value, then the lender profits off the capital gains from its investment. When an owner sells a unit, Options earns back its initial investment, plus the amount that it has appreciated if the price of the home went up.
The details that have not been discussed are, what happens when a home is sold for a loss?
Options soften the upfront financial burden of purchasing a home. But as the value of the home rises, so does the value of the investment that the buyer hands over to the lender when the home is sold.
After 25 years in operation and more than 3,000 homes built, Options for Homes plans to nearly double that number, with 2,100 new condo units currently under development. In all that time, Options has had only five mortgage defaults, Options chief executive Heather Tremain indicated.
Options partners with Toronto-based Deltera Inc., a high-rise residential developer, to build condo units that forgo upscale and costly amenities such as swimming pools and gyms in favour of lower maintenance fees. It also avoids marketing expenses such as model suites – which Options says can add up to $15,000 a unit.
At The Humber (located at 10 Wilby Crescent), Options’ latest development in north-west Toronto, a shared equity mortgage allows home buyers to purchase a three-bedroom condo starting at $635,700 with a down payment of about $40,000. With the additional contribution of up to $150,000, the three-bedroom comes to the price of most downtown one-bedroom-plus-den units, according to Options.
This business model caught the attention of the federal government which mentioned Options in its 2019 budget in March. The federal government earmarked $100-million fund for shared equity mortgage programs such as Options and other organizations that offer shared equity mortgages, such as Toronto-based Home Ownership Alternatives and Trillium Mortgage, to expand their businesses.
Options is still waiting on further guidelines from the government, which plans to launch the incentive in September, but intends to use the funds to expand into other regions within Ontario and build more units.
The federal government also announced an incentive for first-time home buyers administered by the Canada Mortgage and Housing Corp. (CMHC) that would provide 10% of the purchase price of a home. The program differs from Options, requiring that a home buyer have a household income below $120,000 a year. The amount of the insured mortgage and the CMHC contribution would be limited to four times the home buyers’ annual incomes, or up to $480,000.
In terms of the economy, both of these measures are not game changes but they will have a modest impact on markets.
* Trading Equity for Home Ownership written by Benczik Team Realty
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