Ontario’s housing market has become so pricey that one financial startup is betting cash-strapped renters will need to borrow money to cover the soaring cost of moving into a new place.
Nesturo, which launched in late July, says its target demographics include students without a strong credit history, those moving to expensive cities for medical reasons or people in inadequate housing arrangements who need to move but don’t have enough funds saved up for a rental deposit.
“This ensures that they don’t have to drain their savings to be able to move,” said Angela O’Leary, executive chairman of Nesturo.
Ms. O’Leary doesn’t have a financial planning background. Instead, she’s been involved in multiple startups, including a medical supply company working primarily with governments. Among Nesturo’s employees are experts in finance and risk management.
The company’s loan product comes as the average price of a two-bedroom apartment in Toronto hit $3,370 in July, up from $2,709 in the same month in 2020. That means paying first and last month’s rent costs more than $1,300 than before.
Nesturo offers six- and nine-month repayment plans, with repayment starting 30 to 45 days after funds are disbursed. Interest rates start at a surprisingly low 6.99 per cent for applicants with “a stable job and income, a good credit score and no late rent payments.” It also offers loans to people with bad credit scores, but interest rates on those can be as high as 29.99 per cent.
Financial advisers caution that people who can’t afford to pay the higher costs of first and last month’s rent when they move and need to borrow will struggle even more to repay that loan on top of expensive monthly rent.
Zainab Williams, founder and principal financial planner at Elleverity Wealth Management in Milton, Ont., says that while she could see this loan making sense for someone who needs to immediately vacate a bad rental situation, she has concerns about people taking on this kind of debt, especially when the company markets itself to applicants who could have a low income or credit score, and would have to pay high rates of interest.
“It’s a really dicey situation to be in if you have a bad score and took this on,” Ms. Williams said.
The 6.99 per cent interest rate is better than the rate for a line of credit (even borrowers with a great credit score would have an interest rate around 9 per cent for an unsecured line of credit), but Ms. Williams says a line of credit is a much more flexible option when it comes to repayment because banks allow you to pay just the interest without penalty.
That means that if you find yourself in a financial bind in the near future, you can limit your payments until you’re able to start paying off the principal amount again.
Ms. Williams and Andrew Dobson, a certified financial planner with Objective Financial Partners in Markham, Ont., both say consumers should be cautious when dealing with new financial startups because there are often unknowns in how they deal with late payments and other issues.
Nesturo says it charges fees of between $25 and $50 for each late payment, and also raises your interest rate by two percentage points if you make a late payment more than once. There is a three-day grace period for late payments, after which penalties begin. The company’s fee schedule states that additional fees could be incurred for people who continuously fail to make timely payments.
Ms. Williams said anyone considering borrowing to make rent deposits should reach out to their local municipality to find out about financial support programs. Many communities offer rent banks which offer zero-interest loans or grants for first-and-last rent payments for those with low incomes.
Taking a hard look at your monthly budget to see what expenses could be reduced or cut altogether could be the best way to avoid debt when moving.
“Patience is something I think we lack in 2023,” said Mr. Dobson, who said there are all sorts of financial products that allow us to buy things now. But cutting your spending or taking on more work for a short-term financial goal is a better practice.
Mr. Dobson says Nesturo loans essentially bring the buy-now-pay-later model, which has long existed for retail purchases, to the rental market. The problem is that many planners consider this model to be a lazy financial practice.
Mr. Dobson says that if you can’t afford the basic cost of a rental deposit, you should consider moving to other rental markets where rent is cheaper if you can retain a similar salary, or start living with a roommate if you currently live alone.
Toronto rental agent Conrad Rygier says he’s concerned that the company pays security deposits directly to the landlord, rather than giving the money to the applicant.
Mr. Rygier says that landlords could see it as a red flag if an applicant is using a loan for their security deposit, especially because it takes Nesturo one to three business days to release the funds.
That could mean some applicants are overlooked when a unit becomes available. Landlords in many Ontario cities are spoiled for choice and would likely choose a more financially sound applicant, he said.
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Salmaan Farooqui