There’s no such thing as free rent

Despite a chronic lack of supply in the Canadian housing market, it’s becoming increasingly common for construction firms to offer cash incentives to buyers in order to attract more demand and sell units faster. These incentives are usually offered as a cash bonus to buyers, usually on a monthly basis, or may come in the form of a rental guarantee. What you need to look out for if you plan to buy a new build unit, is that these builder incentives could affect your mortgage.

Key Takeaways

  • Some builders offer cash incentives to buyers such as rental guarantees.
  • Lenders take builder incentives into account when qualifying their clients for a mortgage.
  • Accepting a builder incentive may require you to save up more for your down payment if your lender qualifies you for less than you were expecting.

The impact of builder incentives

While free money is always an enticing offer, the reality is builder incentives reduce the amount you’ll be able to borrow from your lender. Lenders take into account any cash incentives or rental guarantees that builders offer into the value of the property. 

As an example, if you were to purchase a pre-construction unit valued at $1,000,000 with the builder offering $60,000 in rent guarantees over the next 3 years, lenders would value that property at $940,000 when it comes time to get your mortgage. If you had saved up $200,000 for your down payment, thinking you’d get approved for an $800,000 mortgage, when the lender only approves you for a $752,000 mortgage assuming a $188,000 down payment, even with your remaining $12,000 you’ll still need to make up a difference of $48,000. 

Some builders are encouraging buyers to hide their incentives from lenders according to this article from the Globe and Mail. We wouldn’t recommend you do that as lenders could potentially sue if they find out, and with Google being available and builders advertising their incentives to attract clients, it isn’t hard to uncover.

Why do builders offer incentives?

At a time when it’s widely acknowledged there’s a shortage of housing and new builds in Ontario, it might come as a surprise that builders would need to offer incentives at all. Typically, builders will offer these for units that are slower to sell, for example after the majority of condos in a building have been sold, a firm may offer incentives to sell the remaining units quicker so that construction can begin. Another reason builders can offer incentives is because they often get rebates themselves from the government and can pass on some of that to buyers. Rather than discounting units which could devalue other properties and make other owners feel cheated, builders offer cash incentives instead to sell off units in a hurry.

Should you buy a property with a rental guarantee?

The key thing is understanding how builder incentives impact your mortgage. Since lenders factor incentives like rental guarantees into the value of the home, you should go in with the understanding that the value of the home according to the lender is less than the sale price. This means you’ll need to be prepared with more than your initial down payment to make up any shortfall in the price that your mortgage won’t cover. If you plan on a 20% down payment, consider saving another 5% to avoid the potential of having a shortfall when it comes time to buy your property.

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