St. John's One Stop Real Estate Shop
Reprinted with permission from (and written by) Darryll Esch of Clear Home Mortgage Solutions in Winnipeg, Manitoba
Chances are, if you have looked at getting a mortgage, you have been shopping around for the best mortgage rate. After all, you are after the best deal, and what is the best deal if not the best rate? A fraction of a percentage point up or down could mean of several thousands of dollars saved or lost over 5-10 years.
So if saving money is your goal, rate is clearly the most impactful factor, right?
Wrong. This is what the banks want you to think. And because it is the easiest factor to compare between banks, most people accept this as a close approximation of truth.
But a mortgage consists of many different features other than rate that can actually cause a great deal of potential savings or losses. In fact, this is how banks make their money off of mortgage agreements. They lure hopeful customers in with rate, using a standardized mortgage agreement that is not customized to individual needs, and their trusting customers literally hand them their money based on what the fine print says — often without being aware of it.
A mortgage can be customized to individual needs and goals to fit your particular financial situation. Just like … say, a car.
Imagine getting a car and focusing only on the price. Seems pretty ridiculous, right? Well, let’s just play with it to see where the argument gets us. One could argue that the point of owning a car is to have the cheapest means of getting from point A to point B — so any car that allows you to do just that in the cheapest way possible is the best car for you (and the best car for anyone, period).
So naturally, price is probably the most important determining factor, right?
Immediately we run into a problem with this argument. While price is a consideration, fuel and repair costs over the lifetime of a car will cost you far more than the actual up-front purchase price. So suddenly the choice becomes very different depending on how far and how frequently you plan to travel. It even depends on what type of driver you are — aggressive, fast accelerating, or calm and gentle.
Someone who travels frequently to remote cities and who is an aggressive driver will be far better off investing in an expensive but energy-efficient car, than a large city dweller who uses the car occasionally to visit nearby friends.
Then you have other factors such as whether you will share the car (two small cars or a large one?), whether you have a large family or not (what type of car?) and whether you have children who will soon grow up and want their own cars (safety and security features).
You even have your personal financial factors to consider — do you have ability to make a large down payment in cash, what is your income, what will your income be in the future, how much do you need to save, are you planning to sell the car in the future to upgrade to a more expensive one?
And all this without even considering personal comfort and enjoyment features.
Which brings us to mortgages. Just as choosing a car comes with a variety of features that may make one particular car suitable for one person but not for another, so does a mortgage. It’s not all about the rate — just as a car isn’t all about the price. Features like period, fixed or variable, optimal amount, penalty clauses, and fine prints around things like how your mortgage is actually managed and by whom (yes, it matters — a lot more than you think).
The problem is, a car is concrete, firm, easy to test-drive, easy to get your head around. Fine print around mortgage terms isn’t. Mortgage rate is. This is why most people focus blindly at the rate, and forget the other crucial factors surrounding a mortgage. It is very difficult to make a fair comparison between the fine print of multiple banks, and make an informed decision around which one is best for you, in your current particular situation, with all the potential future scenarios covered.
The take-away from this article is as follows: Please, don’t determine which mortgage is best for you based on the rate. There are multitudes of factors and considerations around your particular goals, financial situation, and future opportunities to make. Educate yourself, read the fine print, understand it, and ask the bankers the tough questions that forces them to show you their cards. Get in touch with a good broker, someone who understands the foul secrets the banks use to lure you into the interest rate trap, and then determine for yourself if you want to dig into the fine details to make the comparisons, or if you want to hire a good mortgage broker to do it for you.
With todays rising construction and land costs, and peoples desire to move into more mature neighbourhoods, many home buyers who are purchasing homes in the St. John's and surrounding markets are opting to buy an existing home. Very few of these homes are ever "perfect" in the purchasers eyes and more often than not, they want to make changes to personalize their new homes.
One of the biggest mistakes a home buyer can make is to buy a home and then embark on a renovation rampage using their monthly cash flow to improve the home.
Although the "Purchase + Improvement" mortgage (shown in the video above) has been around for many years, the vast majority of home buyers still don't know that you can get all (or at least MOST) of these renovations included in your mortgage when buying your home: even if you're only able to put 5% down on the house. It also, DOES NOT increase your interest rate OR length of amortization.
When opting to do your own renos after your purchase, it doesn't take long for a trip to the Home Depot to become a weekly (or daily) occurrence when you get into renovations and the $200 here and the $300 there can add up to a fairly large sum over a couple of years of constant improvement.
Over the years, I've seen many times where the purchaser takes possession of their new digs, starts the slow updating/reno process only to have many of them back in my office 2-3 years later wondering if they can refinance because they've amassed significant debt while renovating their new home.
Unfortunately, the new rules and regulations that have been implemented over the last few years, coupled with slower house pricing increases, has made it very difficult to extract any of the equity from the home until you've paid down the mortgage over 20% of the balance and/or you're locked into a mortgage product that can cost thousands of dollars to get out (That was never on the glossy brochure, I assure you!)
Seeing a $10-$20k on a credit card or line of credit is not at all uncommon. While it's good that you've added the value to the house, you've created a significant liability for themselves as that same $20k added to the purchase price to do the renos when you bought the property, would have cost you only $41 bi-weekly. (That's not a typo!).
Now, on top of the mortgage payment, these happy(?) homeowners are paying $500-600 per month on the line of credit that is often 3-4% higher than their mortgage is, or if you're putting it all on your credit card at 19.9% it can mean you're paying an extra $600 per month just to meet the minimum payments, (on top of your new mortgage payment) which means you'll spend thousands more than you would have ever saved if you had selected to include the renovations with the mortgage. Needless to say, it doesn't take long to become overwhelmed by these financial obligations that can add unnecessary stress to your life.
Properly structuring your purchase and aligning your intentions with your chosen Real Estate / Mortgage Professionals can save a you a lot of time, money and headache when purchasing.
What would you rather? A $1600 a month mortgage payment +getting everything completed within a month or two, OR a $1500 a month mortgage payment + taking on the task of slowly updating your home over several years, all the while watching that line of credit balance creep up...and up...to a $200 minimum payment, $300....$400...$500.....
I think you know the right answer here.
And, when it doubt, ask questions and let the professionals help, and please share our content if you think this information could help save one of your friends/family from this trap!
If you'd like to know more about this product, or any other, send a note to mark@normanlane.ca or call/text 709-743-3939.
