Do you hear that? That’s the sound of 20,000 people crying out for better rental affordability in Toronto. And it really can’t be denied, the Toronto rental market is out of control. An average condo is leasing for $2,361/month and competition for affordable units in desirable locations is fierce and fraught with disappointment. It’s a struggle for everyone involved, but even harder these days for people with bad credit.
In light of increased pressures and difficulties for renters in Toronto, we wanted to update this post.
How to rent a Toronto apartment with bad credit.
It’s a conundrum, isn’t it? You can’t afford to buy but you can’t find a landlord willing to rent to you because of bad credit. This is a question we’ve been asked for years by readers and would-be tenants calling into the office – can you help me find a Toronto condo for rent even if I have a poor credit score?
If you have bad credit, you’re not alone. It’s a widespread issue and it’s non-discriminatory in terms of who’s at risk. It’s not just people who fall into a low-income bracket who can have bad credit scores – people with healthy incomes can have too much money tied up in assets with very little cash flow, leading to missed loan payments and, eventually, a poor credit score. As well, young people and new Canadians may have no credit history on file at all, making it just as difficult to rent as someone with a bad credit score.
It’s similar to the situation we see with some buyers looking at condos for sale in Toronto who have healthy down-payments but poor credit, making it difficult for them to secure a mortgage. Even an untraditional job without three years of income tax statements to back it up (for example, you recently left a permanent position in a company to freelance) may make you high risk in lenders’ eyes. Lenders and landlords alike are showing higher caution these days, all while demand grows and rental prices increase.
How the Toronto rental market has changed in the last year
Rent in Toronto has increased 10.2% on average from January 2017 to January 2018. That’s an increase of $200-250 on average.*
In the current state of Toronto real estate, privately owned condos make up roughly 80% of the rental market. There is a condo affordability advantage these days, but it’s a double-edged sword for the rental market.
Because condos in Toronto offer this sweet spot of affordability and value, they have become an attractive commodity that investors want to buy and sell. Many investors will hold a condo as a rental property, as long as the investment is cash flow positive. Under current market conditions, it can be a very strong investment.
That being said, investors (or landlords) need to keep rental income up to cover carrying costs. That risk of an investment turning cash flow negative puts a lot of pressure on the renter, impacting their movability and flexibility in areas such as the choice of home, job opportunities, and access to higher education. Most renters cannot afford to buy, which is why they rent. Faced with a $200 increase in average rental prices in 2017, many renters can’t even afford to move laterally, either.
So, what are many renters doing, then?
Renters are staying in their units, keeping their leases longer than previous years. In 2015, the average rental occupancy in Toronto was 16 months, according to research by Urbanation. In 2017, average occupancy had increased to 2 years.
As an investor and a landlord, what would you do? These property owners are under pressure from the new rent controls with a condo investment that is quickly turning cash flow negative. For many, they have little recourse except selling. This condo advantage is actually hurting the supply of rental units, and contributing to the rapid escalation in rental prices.
Renters with bad credit are at an extreme disadvantage in today’s rental marketplace. But there are things that you can do. Here’s what you need to know about securing a Toronto apartment for rent with bad credit.
Things to Know when Applying to Rent a Toronto Condo
Is it Legal for a Landlord to Ask for My Credit History?
Yes, it is perfectly legal for a landlord to request this kind of information. And so unfortunately, it’s not something you can get out of if you hope to rent an apartment. The Landlord and Tenant Board website states:
“A landlord can ask the person applying for the rental unit to provide information such as: current residence, rental history, employment history, references and income information.”
This includes the right to conduct a credit background check and to refuse a tenant who they consider to be a risk.
Check Your Credit Report for Errors
The first step we recommend you take is to know your credit rating before you start looking for Toronto rentals. Even if you’ve done a check in the past, it doesn’t cost a lot to do another. You should do one annually if you’re struggling with credit in order to:
1. ensure it reflects your current situation (credit scores change as your activity changes)
2. take the opportunity to review your history closely as mistakes can be made. There could be errors on your file or omissions that could help build a positive credit profile that you can fix and use to improve your rating.
The Canadian Mortgage and Housing Corporation website is a helpful source to understand the requirements of your credit rating and history, plus they have some tips of their own about renting in spite of bad credit.
Four Ways to Rent an Apartment in Toronto with Bad Credit
So, you have bad credit. That’s unfortunate. But don’t give up. There are a few things you can do to secure a Toronto rental. Your best options are to:
#1 Find a Guarantor or Co-Signer
This is the easiest solution providing you have a close contact with a good credit score who is willing to co-sign your rental agreement and/or act as a guarantor. Most often this is the applicant’s parent(s) or another family member.
A co-signer essentially shares in full the obligations of the rental agreement and co-signs the agreement with you, whereas a guarantor is guaranteeing that they will ensure you meet the obligations. The latter is generally a separate legal document that references the tenancy agreement.
A co-signer is usually more appealing to landlords because a co-signer is immediately responsibility for missed rental payments, acting as a kind of “insurance” to prospective landlords.
A rental guarantor is less appealing because the guarantor is financially liable only after the landlord has exhausted all other possible means of getting the money from the tenant. But still a viable option to overcome bad credit.
We cannot stress more that it’s in everyone’s best interests to ensure that the co-signer or guarantor fully understands the responsibility he or she is taking on. For example, if you fail to meet your rent or any other financial obligation (property or contents damage that you have to pay to resolve), a co-signer is legally responsible for paying that sum immediately to the landlord.
It can be a huge financial responsibility and if your co-signer refuses or is also unable to pay what’s owed, your landlord can sue you both. Always be a responsible tenant and that you don’t put your co-signer or guarantor at risk.
If you are not positive that you can make regular rental payments, think hard about getting into a long-term lease agreement and potentially putting both yourself and your co-signer / guarantor into legal and financial hot water.
#2 Find a Roommate with Good Credit to Assume the Risk
This option involves having another party assume full risk on the rental agreement by being the sole signatory. This means that the signatory is responsible for the full rent to the landlord regardless of whatever verbal or written agreement they have in place with you.
In essence, this is a type of sublet where your roommate is agreeing with the landlord to cover the full rent each month and then, separately, they are subleasing a room / portion of the apartment to you. The difference between this and a traditional sublet is that they are remaining on as an onsite tenant, sharing the premises with you.
This is a great option if you know your roommate well and you trust them. It can be risky, however, if you’re moving in with people you don’t know, particularly if you don’t have a formal sublet agreement on paper outlining your rights.
If you go this route, you must be open and honest with your landlord from the start so they know there are two or more people moving into the apartment despite having only one name on the lease. There are limits to how many people will be allowed under one roof, but generally speaking, as we covered in a previous article on things tenants should know, a landlord cannot prevent their tenant from subletting providing certain conditions are met as outlined on the Ontario Tenants’ Rights website. But unauthorized tenancy is illegal and the landlord could kick you out if you don’t do this above board, with their consent.
#3 Be Honest and Provide Positive References
Honesty really is the best policy when it comes to developing a good relationship with your landlord. Landlords generally want the same things in a tenant – someone who pays their rent on time, is clean, quiet, and respectful of the property and neighbours. It’s a bonus if you’re easy to deal with if and when issues arise. And when a landlord finds a good tenant, they try to hold onto them for as long as possible.
Having a bad credit rating doesn’t mean you’ll miss payments or be a bad tenant. Sure, there is more risk for a landlord when renting to a tenant with poor credit history, and in a competitive situation an applicant with good credit will be likely come out on top, but being upfront and honest can go a long way.
If you present yourself well, are upfront about your credit situation and what you’re doing to resolve it, and give positive references from a previous landlord(s), your employer, and your bank or credit card company (who can vouch that you are on track for improving your situation), a landlord may be willing to forget about the credit report and give a hardworking and honest person a break.
#4 Wait and Get Your Credit Score Back Up
If all else fails, you may just have to wait it out in your current living situation until you can improve your credit score and apply as a better candidate for rental properties moving forward.
Improving your credit score really isn’t rocket science – it’s about paying down your debt and paying all bills on time. Whenever possible, pay your bills in total. Otherwise, always cover at least the required minimum payment. But it does take time.
To learn more about how to improve your credit rating, check out this fact sheet from the Government of Canada.
Proceed with Caution: Paying More in Advance
There are some tactics that can put you and/or the landlord at risk such as offering a higher deposit or paying for six months or a full year in advance of moving in. This is actually in breach of the Ontario Residential Tenancies Act which is the law in this province.
We know of a situation where a landlord denied an application from a prospective tenant who had bad credit. But the tenant was persistent, claiming he was doing everything to get his credit back on track and that cash flow wasn’t the issue. He independently offered the landlord a full year of rent upfront to close the deal, which the landlord accepted.
Upon moving in on day 1, the tenant called the Landlord and Tenant Board (the party appointed by the Ministry to enforce the Tenancies Act) claiming that he felt coerced into the “overpayment” and that he didn’t at the time understand the law.
The landlord was ordered to repay the funds in full, with the exception of first and last month’s rent, and was left with a blemish on his record and a tenant that he didn’t trust when he had had other suitable applicants.
And the tenant can kiss goodbye any hope of a positive reference letter for his next rental transaction.
In this case, it’s the landlord’s fault, frankly, for acting outside of the law. You can see why it makes landlords skittish to agree to atypical terms or “good-faith” / “handshake” agreements and so finding one who will may prove difficult. At the end of the day though, there’s no policing of what agreements are made between individual, private landlords and their tenants unless a formal complaint is lodged by either party. And while a landlord cannot ask for more than first and last, you can offer it.
But know that any time you’re acting outside of the law, both parties are put at risk for what should be a positive event in your life – finding a great new apartment to call home.