Have you been dreaming about building your own home?
Many do, especially those that are nearing retirement and considering building their dream home with all the features and upgrades that they have always wanted. Or maybe you want to renovate your current home to make it more suitable to your changing lifestyle. Whatever the case, how do you make this happen when you are seeking a “Construction Loan” from your bank.
Construction Loans at the banks are not an easy proposition, and for anyone who has gotten one in the last few years – they will probably be able to attest to how tedious and difficult the whole ordeal was to work with a Canadian Bank these days. But building a dream is always worth it in the end, so lets look at what the banks will ask you for.
When you are doing a major renovation or building a home the banks want to do a Construction Draw Mortgage. This is a loan that is initially approved for the entire mortgage amount needed, however only advanced in stages as the work is completed. The payments are made by the borrower for only the outstanding balance as the project goes along and most payments are setup as interest only until the project in finished. A Draw Mortgage can have up to 10 draws but most banks prefer to only offer 3-5 in order to keep administrative and appraisal costs down.
You must provide to the bank a detailed construction plan, drawings, permits, and cost schedule. If you are building brand new, the bank will also probably require you to own the land free and clear (without a mortgage) since the first draw will be based on the land value at 65%. You must keep in mind that the banks usually only provide money after the completion of each stage of construction, so that means you may need to have cash assets to draw on in order to start the project. Let’s look at an example.
If you were building a home for $500,000 and the land value was $200,000 – the total value upon completion would be $700,000. The banks would therefore only provide a mortgage for 80% which would be $560,000. You would have to have the balance of $140,000 in cash or at least the full ownership of the land. Most Canadian banks require that the land be owned mortgage free, so that they can take the first draw from the land equity to start construction. In this scenario, a $200,000 land value would net $130,000 at 65%. The $130,000 would then be offered in the first draw to begin construction and the land would be used as collateral. In this example, if the client owned the land mortgage or debt free, they would not have to come up with any additional funds during construction. The bank would advance the other $430,000 as the construction progressed. With this in mind, remember we only needed $500,000 to build, so we have an ample financial cushion should costs increase during the build. Of course please remember that the lender will also want to ensure that you can make the payments on the new mortgage once it is setup at the end of the project so income qualification, credit checks and application approval would also be necessary.
When you are applying for a Construction Mortgage at your bank, please make sure to have an experienced lender who is familiar with the process and has done them before. There will be a lot of future decisions, stress and worry when you are going through the construction of your renovation, and having a bad experience, delays on receiving funds or any surprises from your banker, could leave you with unpaid commitments that only make the whole process feel that much longer.
Keep dreaming, build your dream! Remember to always do your homework before you get started. Interview your banker. Have a well thought out plan and then make it happen!
Partners with separate accounts
“There is strength in becoming unified together toward your own personal plans to wealth.”
If you plan to retire together, you must save and dissolve your debt together. It is vitally important that both partners be involved in the financial decision process. I have found that the most financially successful couples, were those that combined their incomes, working together to spend and save for their future. Those couples that kept their finances separated or secret with separate accounts and liabilities were always worse off. I have not seen one example in over 20 years of lending, where keeping separate money works. One partner is always languishing and the debts get higher while the savings never grow. It just doesn’t work. As a couple, if you want to retire debt free and wealthy, you must work together for a common goal. Dream together, plan together and remove uncertainties.
5 years to retirement
“You need to build a brick wall around your finances to protect your assets and prepare for the future.”
The question may not be if there is enough money to retire, but rather if you can even afford it at all. With investment portfolios pressured by market volatility, rising household debt, and a future expectation of a budgeted lifestyle, most people nearing retirement are becoming more and more worried. There is a big difference between someone who has only five years to retire versus someone at 50 with perhaps fifteen more years to go. Don’t be overly optimistic if you are approaching retirement with debt and always use common sense when securing your future.
Some may find that they need to set their projected retirement date back a few years and continue working so that they can continue to save. Reducing expectations, working longer hours or even returning to work to fund the future security needed as we get older is becoming more of a reality with Canadians approaching 65. Unfortunately, being inadequately prepared for retirement may result in you having to sell your home to supplement the needed income or to liquidate debt loads that have become too much to handle.
Don’t be swayed by the crowds of people marching to retirement begrudgingly accepting a life with debt.
Beginning your non-working years with little to no debt vastly increases the chances of having enough money to live on.
Giving up on retirement
“Don’t let the worry about money have a toxic effect on your life. Know where you want to go and set yourself up to get it.”
I hear it all the time from Canadians that say they are going to enjoy their life now and not worry about retirement; they might not even live long enough. Well, yes that is true, but most likely you will live a very long time and then what?
This is usually a cry for help, when people feel like they have tried everything and can’t improve their current financial situation. Telling yourself to live for the present to rationalize your spending will actually create more anxiety as time goes on about the uncertainties of tomorrow.
The reality is that when you have your finances in order and are saving for the future, you feel better, you have less anxiety and you feel more empowered and secure. Consider continually analyzing your net worth to monitor your ongoing saving success. Take a good look at your financial snapshot and measure growing assets against personal debt. You will need to regularly monitor your net worth and ensure it is increasing year over year. Build a separate savings portfolio and resist the urge to use your home as your only retirement savings.