Building a home from the ground up can be both an exciting and a daunting experience. On one hand, it is exciting to be able to choose your land, your home plan, and the finishes. On the other, a build requires extensive planning with not only the build itself, but also regarding landscaping, services, and the financing of it all. This is why it is important to surround yourself with professionals from the very beginning so you can have a clear plan moving forward.

As a Mortgage Broker, I always strive to ensure that my clients are aware of all options and have assistance throughout the financing process. With a new build, there are two options regarding your mortgage: you can have either a Completion Mortgage or a Draw Mortgage. A completion mortgage is where you enter into a purchase agreement with the builder, but they carry all costs until completion – including the land and services. Your builder will require a deposit, which will be held in trust with a Solicitor and will form part (or all) of your down payment. Once the property is ready for possession, your mortgage will be funded and the builder will be paid.

A draw mortgage will allow the Builder access to funds during the build in stages. This process is more involved than the completion mortgage, but has it’s advantages as well. Here are some important points to consider:

• Land Purchase:
  • You will need to have purchased the land you’re going to build on before starting the build and will require a minimum 25% down payment on the land itself
  • This mortgage will then get paid out as part of the mortgage draws for the build (typically this is paid out on the first draw of your mortgage)
  • If your land is not serviced, you will need to pay for these with cash unless the builder adds these into the construction quote and manages the installation.
• Down Payment:
  • You’ll need a minimum of 5% down payment on the total (completed) value of the property if this will be owner-occupied. An investment property will require a greater down payment (20% or more). Your builder will also require a deposit to begin the build – this will form part of your down payment and will be held in trust with a Solicitor.
  • The value of the land, services (if already in place), and completed build will be determined via an appraisal. This appraisal will break down the value of the land and the home separately, as well as give value to the total package as if your build were 100% complete
  • As long as your equity in the land and services is equal to or greater than 5% of the total appraised value for the as-complete property, this can be used for 100% of your down payment. For example, if your land is valued at $120,000, you would need a $30,000 down payment. If your as-complete value is $650,000; you can use the $30,000 land equity towards your total down payment on the build –  the minimum down payment required for a $650,000 purchase is $40,000 and so you would only need an additional $10,000 for down payment.
  • If you would like to add cash to have a greater down payment, you can definitely do this as well
• Builder Requirements
  • The builder will need to be a new home warranty certified builder
  • They’ll provide you with a purchase contract, detailed list of finishing options (often accompanied by a list of cost allowances) and a copy of the plans. The appraiser will use these to determine the value of the home at completion
• Mortgage Payments
  • During the build you will only pay interest on the portion of funds that have been advanced to the builder.
  • Funds are released in ‘draws’ – payments – based on specific completion stages, as outlined by the lender. The final draw will be released for the builder once the home is 100% complete and ready for occupancy.

It is important to ensure that you have had a pre-approval completed prior to entering into a contract with your builder. This will not only ensure that you are qualified based on lender guidelines for the total cost of the build, but is also a great time to discuss your contingency plan in the event of cost overruns and the cost of adding services to your land, if needed.

If you would like to learn more about your mortgage options for a future build, do not hesitate to reach out!

Email: jenni.jackson@dlcme.ca
Cell: 780-897-0166

VARIABLE vs FIXED

When it comes to mortgages, the age-old question remains: “Should I go with a variable or a fixed-rate?”. To make an informed decision, it is important to look at not only the historical trends, but to also be aware of your own comfort level. There is no advice that can be a blanket solution for all borrowers and for every situation.

When it comes to variable versus fixed-rate, it is important to understand what these mortgages are based off of:

Fixed Rates

Fixed mortgages are so named as they are based on a fixed interest rate that is set for the duration of the term with fixed payments. These rates are based primarily on the Canadian bond yields – as yields rise, you can expect an increase in the fixed interest rates being offered to Borrowers. Once you accept your mortgage commitment with a lender, that rate is guaranteed for the duration of your term.

Variable Rates

On the other hand, variable-rate mortgages fluctuate with the Prime Rate. This can either mean fluctuations in your payment or – if you choose to have set payments – the interest portion of the payment will flucuate. The Prime Rate is directly affected by the Bank of Canada’s overnight lending rate – as this rate fluctuates, so does the Prime Rate.

In the last 10 years, the prime lending rate has gone from 2.50% to 3.95% and now sits at 2.45% as of January 2022. Due to recent events, these rates have seen a downturn – providing huge benefits to new borrowers looking to pay as little as possible.

While a variable-rate mortgage could cause fluctuations in interest being paid, historically, the choice of a variable rate mortgage over a fixed rate has allowed borrowers to save in interest costs. Particularly because variable rate mortgages are often offered at a much lower rate than their counterpart, the fixed rate.

The uncertainty of a variable rate; however, means that this is not a product for everyone and it comes down to the borrowers comfort. Some individuals have no wiggle room in their budget for potential changes in mortgage payments, or they do not like the uncertainty of not knowing exactly what their mortgage payment will be each month. For these clients, a fixed-rate would be the best choice.

If clients are comfortable with a variable-rate mortgage, they have a unique opportunity to take advantage of lower interest rates. One option is to set your mortgage to a fixed-payment so that if the interest rate drops, it means you are paying more on your principal amount each month. On average, every 10% increase in payment can save three years off the amortization of a five-year term and so having fixed payments can provide extra benefits with falling interest rates. Or, if your payments are set to flucuate, you may see your monthly payments drop in accordance to decreases in the Prime Rate.

But what if the Prime Rate increases?

If your payments are set to flucuate with each change, then no action is needed on your part. If you have set your payments to a fixed amount, you will want to consult with your Mortgage Broker to ensure that your payment is set at an acceptable level to ensure that not only the interest is being paid, but that an appropriate amount of the principal is being paid as well. This is where accessing the skills of a knowledgeable Mortgage Broker are a huge advantage. If you choose a variable rate, know that it would take several increases in Prime Rate to catch up to where fixed rates are currently at. I inform all of my variable rate clients any time there is a change to the Prime Rate so that you are kept up-to-date!

Most lenders will allow you to convert your variable rate to a fixed rate if you begin to feel uncomfortable with the flucuations. Your lender will convert your mortgage to the rate that closest matches your remaining term. As an example, if you are in a 5 year term and have 3 years remaining, the lender will convert your current variable rate into a 3-year term fixed rate.

Differences in Penalty

A big benefit to variable-rate mortgages is that if you choose to sell before the mortgage term is up, the penalty is typically only three months interest as opposed to the much heavier interest rate differential (IRD) calculation used to determine fixed-rate mortgage penalties. This can provide you with more flexibility if you find yourself needing to make a change to your mortgage mid-term.

There are a few statistics out there that state that over 60% of homeowners break their mortgage term within the first 3 years. The difference between three months of interest as a penalty or an IRD calculation can be several thousand dollars.

If your mortgage is maturing in the next 60-180 days and you’re not quite sure what to do, give me a call! Not only can I provide tips for your existing mortgage to help save you money, but I can also help you assess whether there is a better product available and if you should make the switch to a new lender.