Before I get into the topic of new home financing, I want to share some positive news! The Ontario housing market is definitely alive and well! I’m seeing new properties come to market and disappear within weeks or even days. Multiple offers are also a reality, once again. Watch for encouraging sales stats to be reported next month.
Buying a resale home
Buying resale is great because you can see what you’re getting and you can have it now (average closing is 45 to 90 days). You can also set and hold your mortgage rate now.
But, there are also some negatives to buying a resale. For one, you’ll never get 100% of what you want. Maybe the kitchen, master bedroom or backyard could be bigger or perhaps you’d prefer a different floorplan. The truth is, you’re buying someone else’s home that wasn’t designed for you.
But, hey, that’s life and you can’t have everything you want. At least, not yet… or maybe you can?
Construction financing as low as prime minus 0.80% – 3.15% today!
If you’ve gone through the process of buying resale a few times already, then maybe you’re ready to build that dream home? This home would have the perfect kitchen, the right sized ensuite bathroom, the family room with surround sound home theatre, the games room you’ve always wanted, the nanny suite for older kids or parents, etc.
Whatever your reasons, you want a home that matches your needs and you’re in a position to take action. Congratulations! Here’s some info on how you can save a lot of money and avoid many headaches when it comes to financing your dream home.
How do I buy the lot and arrange the construction?
First, you need to find the right location. Consult an experienced Realtor who can help you search for a location that will show growth for future value. They can also give you advice on what to build and how much to spend. You don’t want to overbuild.
You’ll also need a good builder. Believe it or not, there are many that come in at or under budget. Yes, it’s true!
A trusted lawyer is always important to avoid any issues with title. And they can also give advice on what you can build in that area.
Finally, you’ll need an experienced Mortgage Broker to take care of the money matters. Be sure to find someone who’s familiar with construction financing and the process of getting you funds at a low cost with the least amount of hassle. The last thing you want is a bank that’s holding up funds.
How does construction financing work?
First, you need to buy the property. Sometimes that involves buying a vacant piece of land… or a lot with an existing house that you’ll tear down and replace with your new home. Either way, you’ll need to buy the property and, in most cases, come up with financing.
Pro Tip: Did you know that all banks are not alike? Construction financing programs vary greatly from bank to bank. Some are good, while others are horrible. Rates and fees can vary greatly. You also want to make sure you can access funds without having to go through a big process or lots of red tape. If you focus just on rate, you can overlook some very important details!
Construction financing begins when you buy the lot. With most lenders and banks, the rates are in the bank prime plus 1% or 2% range. There are also fees charged by the banks on top of this (more on that later).
A construction loan is just a temporary loan to facilitate the acquisition and building costs of the house and land. Once the house is completed, the construction mortgage is replaced with a traditional mortgage. Interest rates for the mortgage are usually set closer to the completion of the building. This can be an added degree of stress for some if interest rates were trending upward.
Speaking of rates, here’s some good news! Construction financing rates can range from prime plus 2% to prime minus 0.80%. I recently arranged a $1,000,000 construction loan. These were the quotes offered by various banks and other lenders. Plus, some banks wanted the clients to put up more of their own money throughout the construction. The savings to my clients added up to $24,000. Wow!
Here’s an example of what one of the better construction loan programs looks like step by step. This is one of my favourites.
- The lot can be bought with a 50% loan-to-value (LTV) mortgage. (80% is possible if permits have been obtained)
- Once permits have been obtained, you’ll get access to 80% of the land cost
- If buying land with an existing house, it’s possible to get 80% LTV
- Pricing today is prime minus 0.80% (that’s 3.15%) for qualified applicants at AAA mortgage rates. That’s your rate from day one. It’s also your mortgage rate when your construction mortgage ends
- Financing up to 80% of land value is possible at this same rate
- Funds are advanced in draws as construction progress is made
- First four draws can be done with no fee (most banks charge a fee that varies)
- Typically, three to four draws is all that’s needed
- Your advance is calculated by multiplying the construction costs by the percentage complete
- There’s always a 10% construction lien holdback, which is released 45 to 60 days after the home is completed
- Once your home is complete, you’ll get your final takeout mortgage (less the above mentioned 10% construction lien holdback). After 45 days have passed, if the contractor has no issues – meaning you’ve paid them in full – your funds are released and your regular mortgage begins
If you’re looking to build your dream home or just want a custom home with your own personal touches, take the first step and get some info. Find out how much it costs. Then contact an experienced Mortgage Broker who can put this together for you. There are some great programs available that are not well known. You could be overpaying in extra interest costs and fees if you don’t use a broker experienced in construction financing.
Let’s keep more money in your pocket! The banks have enough.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; firstname.lastname@example.org
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.