Financing a New Ottawa Custom Home/Cottage or Major Renovation – Part 1
Financing a New Ottawa Custom Home/Cottage or Major Renovation
You are planning to build your own Ottawa custom home/cottage or do a major renovation. It’s an exciting opportunity and you’ve spent hours pouring over design magazines, watching design shows and searching for just the right finishes. Now it’s time to make the dream a reality and one of the first steps is to determine how you are going to finance the project. We spoke with two local mortgage experts, Pat Kavanagh, Mobile Mortgage Specialist at RBC Royal Bank and Debbie Davidson, Mobile Mortgage Advisor at CIBC, to gather some helpful information and tips. Over the next three weeks we will share some of the information you may want to consider when determining how to finance a custom home or cottage. Every situation is unique; so this article is meant as general information only and mortgage rules may have changed since publication. For advice specific to you and your financial situation, please consult a qualified mortgage advisor.
When you have the guidance of an experienced architectural designer behind you, building your own Ottawa custom home or cottage or doing a major renovation is an exciting process that will result in a space that truly fits your wants, needs and vision. Jim will propose a realistic budget, design a beautiful home and provide project management during the construction phase, giving you the opportunity to focus on the fun aspects of your new custom home and relieving your from managing all of the build details and challenges. From a financial standpoint, it does take substantial resources to finance your own home or cottage build. However, if you own your own home and have significant equity, little or no debt and a good, stable income, the home of your dreams may be within reach.
How does the lender qualify the borrower for a new custom home or cottage?
If you want to live in your current home until your new custom home is complete or you are building a cottage, you are required to prove that you have at least 20% of the total appraised value of the new home (35% for a 3-season cottage) free and clear. You must qualify upfront for the total amount of financing required to carry your current outstanding mortgage plus the amount to be financed for your new project and any other debt you currently carry. If you have an unused balance in your line of credit, that money can be used to finance a portion of the project or can be used as a contingency fund for project changes and additions. The value of your new to-be-built home is determined based on the value of similar homes in the same area and your lender may reduce the amount available if they feel you are “overbuilding” for the area. The lender will take into consideration the reputation and experience of the architectural designer and project manager. Engaging professionals with a proven track record reduces risk. To be approved for the financing of a high-end home build, most lenders will require you to hire a project manager.
How does the financing work during the construction phase?
When providing a construction mortgage to finance a construction project, your lender will do a series of appraisals to ensure that the money being paid out to contractors is in line with the actual value of the work performed to that date. Therefore, after an initial draw to begin the work, there will be a series of appraisals and draws as the project progresses, with a 10% holdback to be returned to you once your home or cottage is 100% complete and the mortgage is capped. A “draw” is the method the banks use to release the money to pay for supplies and contractors as the work is completed throughout the building phase. Typically, a total of 4 appraisals and draws are permitted. If you contract with Jim Bell Architectural Design & Build to provide project management services, we will manage this process for you, paying invoices as the work is completed and determining the appropriate times to request additional money from your lender. During construction, you pay only the interest on the amount borrowed to date and once your home is complete the principal and interest payments will begin.
Next week we’ll look at financing for renovations, using a home equity line of credit and what you can do to prepare yourself financially when you are planning to build a new custom home a few years down the road.
If you are embarking on the journey of building an Ottawa custom home or cottage or you’re considering a major renovation, take a few minutes to chat with Jim Bell. He has over 30 years of experience making dreams come true for hundreds of very satisfied home and cottage owners. He will listen. He will help you to shape your vision. And he will gladly carry the burdens so that your journey is easier every step of the way. If you are ready to discuss financing with a mortgage expert, he can connect you with Debbie or Pat, who will gladly meet with you to discuss the best financing options to achieve your dream. Connect with Jim today!