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June 14, 2016 By

Construction and renovation loans

If you plan on building your own home or are planning a major renovation make appointment with us. We can explain draw calculations, budgeting for those draws, appraisal issues and guide you through these and a myriad of other potential pitfalls.

Cost to complete means that the lender always holds back enough of the approved mortgage to complete the project. This calculation can create a lot of problems for inexperienced owner builders who miscalculate the draws and end up in a budget shortfall. Basically, the lower the loan amount in relation to the actual cost of the build, the bigger the holdback. Just because you’re at 45% complete does not mean you will get 45% of the approved loan amount.

For example, if you have a 500,ooo draw mortgage approval and you have a construction budget of $600,000.00. If your first draw is at lockup (typically 45% complete) then your first draw would be $500,000 minus the cost to complete which is 55% of $600,000 ($330,000). This means your first draw would be $170,000 less any earlier loan amount advanced.

So you can see the potential issue, you’ve spent 45% of $600,000 ($270,000) but only get $170,000. The 100K shortfall can be a nasty surprise if you’re not prepared. We have had this problem and many others come across our desks so the sooner you involve us the less likely it will be you will run into avoidable issues.

If you are in this situation, give us a call, we have solutions.

Over 25 years experience in construction lending, we CAN answer your concerns.

Filed Under: Kelowna Mortgage
May 16, 2016 By

Construction loans including self builds

abandoned_home_construction.gi.topMany people dream of building their own home. Some have construction management experience and many have none. The history of lending to self-builders can be described as checkered at best. Inexperience leads to cost overruns, cash shortfalls and schedule delays. This leads to a lot of handholding and conflict, between the lender and the  borrowers.

As a result most lenders simply won’t lend to self-builders and most require New Home Warranty Insurance, charge fees and charge a higher rate to offset the higher administrative costs. (we have lender that doesn’t require NHW).

One of the most common issues faced by  builders is understanding and budgeting for the “cost to complete” calculation of mortgage advances. In simple terms, the lender will always hold back enough of the approved mortgage loan so the project can be completed. Where this becomes a big issue is when the loan is relatively small compared to the overall cost of construction. For example, if the cost of construction is $400,000.00 and the loan amount is $300,000.00 and the project is at lockup (40% complete).   The lender will hold back the cost to complete (in this case 60% (100%- 40% completed) of $400,000.00 which is $240,000.00) So the draw at lockup would be $300,000.00 minus the cost to complete holdback ($240,000.00) for a net draw amount of $60,000.00.  Naturally this often means the owner builder is pushed immediately into  a cash crunch on first draw unless they properly budgeted in advance.   If there has been a land advance, that amount is usually deducted from the first draw, making the cash flow  situation even worse.

Rates run from prime plus 2.5% to prime plus 5% and fees are typically 1-4%. These rates are subject to changing market conditions of course and what rate you would get would be determined by your individual situation.

You can see it’s important to seek out an experienced mortgage broker that understands the cash flow issues, the application issues  and can help you develop a realistic plan that will save you a lot of heartache and expense.  We at the Lending Outlet have been arranging residential construction mortgages for 25 years and can certainly provide the necessary expertise to save you money, time and worry.   Call us to set up an interview.

We will pay referral fees to brokers.

 

Filed Under: Kelowna Mortgage Tagged With: , ,
January 4, 2016 By

Do Low Rates mean Higher House Prices?

The short answer is, a little bit maybe.
In an interesting study, that I found in reference section of  the Bank of Canada’s Mortgage Securitization Report, (http://www.bankofcanada.ca/wp-content/uploads/2015/12/fsr-december2015-mordel.pdf), it was found that mortgage rates only affected prices by a negligible .45%. The report showed a very weak link between mortgage rates and prices which I thought was counter-intuitive. However there were two items that had big influences on price,  access to credit and household income. I quote from the authors conclusion on page 25,  ”

“We estimate an elasticity of house prices to interest rates that is below 10, implying that the drop in mortgage rates cannot account for the increase in house prices between 2000 and 2006. However, we do show that those credit conditions matter for the formation of prices. Our results do not support a view that credit market conditions purely respond to housing demand, but point instead to a directional effect that easier credit supply leads to an increase in house prices. ”

So easy lending policies and a good employment outlook vs low rates are bigger factors in driving house prices up. The original report is here (http://www.nber.org/papers/w17832.pdf)

The Lending Outlet (https://lendingoutlet.ca) has access to the Chartered banks and their smaller competitors so we have access to a variety underwriting policies that may suit your needs. We can help when your bank won’t.

Filed Under: Kelowna Mortgage