For clarification - how exactly does the recognition to your payment of the mortgage work? The portion of debt reduction (increase in equity) from mortgage payments should be quite modest as most of the payment is going to interest.
Shared down payment program… Would you do it?
I came across this company Lotly that offers a shared down payment program. The way it works is that:
Just thinking out loud here, the pros I can see is that
The cons:
This program sounds quite interesting to me. What do you folks think of this?
- I put in 5% down payment, and Lotly put in another 15% down payment. I can use all this money to buy a place.
- I will pay for all monthly costs like mortgages & maintenance. I get to keep all the equity I pay down through mortgage payments.
- Towards the end, I will pay roughly 50% of home appreciation to buy out Lotly.
Just thinking out loud here, the pros I can see is that
- I could really use some help on down payment to buy the place I want
- There is no monthly payment to Lotly
- I keep all the equity I pay down on my mortgage every month. Better than renting!
- Seems like renovation is allowed
The cons:
- 50% appreciation is quite a bit to give away, especially if the market does well
- My monthly payment is likely to be higher than what I’m paying for rent atm
- I can’t sell the place in the first 3 years
This program sounds quite interesting to me. What do you folks think of this?
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... if you really want to be a "homeowner" (first time only), then this program can help.I came across this company Lotly that offers a shared down payment program. The way it works is that:
- I put in 5% down payment, and Lotly put in another 15% down payment. I can use all this money to buy a place.
- I will pay for all monthly costs like mortgages & maintenance. I get to keep all the equity I pay down through mortgage payments.
- Towards the end, I will pay roughly 50% of home appreciation to buy out Lotly.
Just thinking out loud here, the pros I can see is that
- I could really use some help on down payment to buy the place I want
- There is no monthly payment to Lotly
- I keep all the equity I pay down on my mortgage every month. Better than renting!
- Seems like renovation is allowed
The cons:
- 50% appreciation is quite a bit to give away, especially if the market does well
- My monthly payment is likely to be higher than what I’m paying for rent atm
- I can’t sell the place in the first 3 years
This program sounds quite interesting to me. What do you folks think of this?
Keep in mind of other details not mentioned:
- aside from the mortgage, usual home maintenance costs later (eg. property tax, utilities, etc.), you're also responsible for all the initial costs incurred for the purchase eg. legal, transfer, fees and taxes, etc. Lotly states this works out to about 3% (additional) costs on your purchase price.
- Don't think about leasing it out - no fixed term or formal lease allowed. It's strictly a "principal residence" occupied by you and/or family.
- You need to buy-out/pay back Lotly investors within 10 years of the program.
- No guarantee that your house will "appreciate".
In a falling market, seems pretty good. In a rising one, pretty expensive.
Lets take my area, prices increased 2.5x over 10 years
Assume $100k house to make math easy.
$15k Loan.
after 10 years, the house is now 250k, gain of 150k, I owe them $75k, I assume you ALSO have to repay principal, so you owe them $90k.
That's assuming they even accept your $250k valuation.
Imagine if they insisted that the prices increased even more, or if they decide to tax capital gains on a primary residences.
If the management is marginally competent and ethical, I think this is a great investment opportunity.
I am really concerned about their ethics however. While they are taking some risk, they're really taking an outsized portion of the return.
Lets take my area, prices increased 2.5x over 10 years
Assume $100k house to make math easy.
$15k Loan.
after 10 years, the house is now 250k, gain of 150k, I owe them $75k, I assume you ALSO have to repay principal, so you owe them $90k.
That's assuming they even accept your $250k valuation.
Imagine if they insisted that the prices increased even more, or if they decide to tax capital gains on a primary residences.
If the management is marginally competent and ethical, I think this is a great investment opportunity.
I am really concerned about their ethics however. While they are taking some risk, they're really taking an outsized portion of the return.
The CMHC offers a much better shared equity mortgage program.
It is pretty simple....you pay 5% -10% down and the CMHC matches it. When you sell the home, you pay the CMHC 5% - 10% of the sale price.
If the home value goes down, the government shares in the loss.
Basically, CMHC owns 5 - 10% of the home and you own the rest.
It is pretty simple....you pay 5% -10% down and the CMHC matches it. When you sell the home, you pay the CMHC 5% - 10% of the sale price.
If the home value goes down, the government shares in the loss.
Basically, CMHC owns 5 - 10% of the home and you own the rest.
First-Time Home Buyer Incentive | CMHC
An introduction to the First-Time Home Buyer Incentive and links to tools and resources to help you prepare to buy your first home.
www.cmhc-schl.gc.ca
A word of caution........any lender who advances down payment will be registered on the mortgage as co-owner or lien on the home.
That would complicate any future financing involving the home.......such as a HELOC or borrowing for renovations and using the home as collateral.
This could also create problems with the lender for the prime mortgage.
You would have to obtain permission from them to attach the home as collateral for anything.
That would complicate any future financing involving the home.......such as a HELOC or borrowing for renovations and using the home as collateral.
This could also create problems with the lender for the prime mortgage.
You would have to obtain permission from them to attach the home as collateral for anything.
I would check the details around how the equity participation changes in a down case. Per the FAQ; the investors get a return of their investment less a part of the change in homes value. Which may or may not be the same thing as a pro rata change in value of the equity split to each party. If the investor essentially gets a liquidity preference on their original contribution, then the share of equity loss may be quite different than expected. In structure this seems to me to mirror a participating preferred which is quite common in venture capital.In a falling market, seems pretty good.
@Covariance
In a falling market it might be a cheap way for the participants.
Really this is so strong in favour of the investors/investment management company it feels a bit sketchy.
But since things like water heater rentals have been allowed to continue, and even expand into furnace rentals the gov might let it go, if they feel it is "helping".
In a falling market it might be a cheap way for the participants.
Really this is so strong in favour of the investors/investment management company it feels a bit sketchy.
But since things like water heater rentals have been allowed to continue, and even expand into furnace rentals the gov might let it go, if they feel it is "helping".
I agree with your take on it. Except the falling market. I can see scenarios where the owner ends up with negative equity. And thus would have been better to wait before purchasing.@Covariance
In a falling market it might be a cheap way for the participants.
Really this is so strong in favour of the investors/investment management company it feels a bit sketchy.
But since things like water heater rentals have been allowed to continue, and even expand into furnace rentals the gov might let it go, if they feel it is "helping".
Not necessarily, in a lot of cases comperable rent is might be similar. You might actually be "throwing away" less money.I agree with your take on it. Except the falling market. I can see scenarios where the owner ends up with negative equity. And thus would have been better to wait before purchasing.
But I'm sure they've thought of and modelled that out. These types of schemes require on financial/numeric illiteracy, or desperation, like most of the rent to own schemes.
Agreed, you make excellent points here.Not necessarily, in a lot of cases comperable rent is might be similar. You might actually be "throwing away" less money.
But I'm sure they've thought of and modelled that out. These types of schemes require on financial/numeric illiteracy, or desperation, like most of the rent to own schemes.
I think it will be settled at the end of the term when I sale the property or refinance. Also you are 100% right that I would build less equity over the years with the current interest rate.For clarification - how exactly does the recognition to your payment of the mortgage work? The portion of debt reduction (increase in equity) from mortgage payments should be quite modest as most of the payment is going to interest.
Just curious why you think this would only work for the first-time homeowner?... if you really want to be a "homeowner" (first time only), then this program can help.
Why would a current homeowner need help with a downpayment? Normally you would use the equity in your current home as a downpayment on the next.Just curious why you think this would only work for the first-time homeowner?
Thanks for sharing this! I didn't know CMHC offers a program like this. I wonder how it is like to work with CMHC on this. Are they gonna be as slow as they normally are...The CMHC offers a much better shared equity mortgage program.
@Covariance
The company said that in a falling market, investors will share the same percentage of loss as they would for the upside. The thing is I wouldn't want to sell or refinance if the property value is lower than what I bought it for, because I would also lose part of my downpayment. In that case, it's better if I can extend my 10 year term, hoping that the market will come up eventually.
The company said that in a falling market, investors will share the same percentage of loss as they would for the upside. The thing is I wouldn't want to sell or refinance if the property value is lower than what I bought it for, because I would also lose part of my downpayment. In that case, it's better if I can extend my 10 year term, hoping that the market will come up eventually.
I thought of doing this years ago. Let's look at it from the investor's standpoint. Suppose I have some money to invest and I like real estate as an investment.
Typically, house prices double in ten years. So I would be looking at getting back $50 capital gain on every $15 I invest. In nice, safe real estate. With the provision that if the home buyer welshes I can take the house or sell it under power of sale. Looks like a good deal to me.
Now what about the home owner? He or she might be looking at buying a nicer house than they could otherwise afford, if they can even afford a house. BUT the monthly payment would be low, for 2 reasons. The 20% down payment means they get the lowest interest rate and no CMHC fees, and the mortgage would be 15% smaller.
In exchange they would be giving up half the appreciation on a house they couldn't have bought in the first place.
So, it could be a good deal for both parties.
Incidentally if you know anyone with money to invest, or if you are an investor who knows some potential home buyers you might be able to do this without the middle man and save some money. Otherwise it might be worth paying a small fee. Of course you will have to get the details and have your lawyer check it out.
- I put up 15% as down payment on a house
- I have no maintenance to do, no payments, and no tenant hassles
- I get 50% of whatever the house goes up.
- I pay low income tax on a capital gain
Typically, house prices double in ten years. So I would be looking at getting back $50 capital gain on every $15 I invest. In nice, safe real estate. With the provision that if the home buyer welshes I can take the house or sell it under power of sale. Looks like a good deal to me.
Now what about the home owner? He or she might be looking at buying a nicer house than they could otherwise afford, if they can even afford a house. BUT the monthly payment would be low, for 2 reasons. The 20% down payment means they get the lowest interest rate and no CMHC fees, and the mortgage would be 15% smaller.
In exchange they would be giving up half the appreciation on a house they couldn't have bought in the first place.
So, it could be a good deal for both parties.
Incidentally if you know anyone with money to invest, or if you are an investor who knows some potential home buyers you might be able to do this without the middle man and save some money. Otherwise it might be worth paying a small fee. Of course you will have to get the details and have your lawyer check it out.
The most important question is can you qualify for a mortgage for 80 loan-to-value. With the stress test as a barrier, you would need a fairly high income and little debt if any. They also mention an extra 3% is needed for closing costs. Are you paying for their lawyer? They mention a fee is included in the 3%. What is the % for the fee. Before you sign any commitment have a real estate lawyer go over it in fine detail. Are there any red flags that he/she sees? Don't listen to others. Get professional advice. It is your money at stake.
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