A few weeks ago I met with our mortgage specialist at TD Canada Trust to discuss the process of upgrading our house. With a growing family, one of our goals is to move out of our 2 bedroom 1 bathroom house and build a larger house closer to where I work. This is an exciting time for us, however there are a few things for us to consider during this process:
- How much can we afford to spend on our new house?
- How much will our down payment be?
- When do we put our house up for sale?
The bank determines how much you can afford to spend on a house by looking at your income, your debt expenses including loans, leases, credit cards, and line of credit, as well as your estimated monthly heating costs and property taxes. Then they look at your down payment amount and the interest rate that you will be paying.
In order to qualify for a mortgage, you must qualify at the 5 year fixed rate, even if you opt for a variable rate or shorter fixed term. The current 5 year fixed rate is 5.29 percent. We will likely choose between a variable rate mortgage or a 1 year fixed rate mortgage, as both will likely save you money over the 5 year fixed rate.
The minimum required down payment for a mortgage is 5 percent. Any down payment amount less than 20 percent is subject to CMHC fees, which is mortgage loan insurance that lenders are required to purchase for high-ratio mortgages. The lender passes on those fees to the consumers, which are between 1 – 3 percent of the mortgage value. A $300,000 mortgage with a 10 percent down payment would be subject to a 2 percent CMHC fee, which would add an extra $6,000 to your mortgage. We want to put at least 20 percent down on our new house to avoid CMHC fees.
The builder that we would like to work with typically takes between 4 and 5 months to build a house. This leaves us with a few options for our existing house. We can put it up for sale immediately upon beginning construction of our new house, and hopefully the timing will work out between our possession date of the new place and the sale and possession of our current house. Or we can try and sell our house prior to starting construction of our new house, but then we will have to find a place to rent while the new house is being built.
The other option is to enter into an “intent to purchase” with our builder, which means they would start building our house and we would put our current house up for sale, but after 3 months if we haven’t sold our house we can opt out of the agreement. The drawback to that option is that we most likely wouldn’t get to customize the house to our tastes, since the builder would want the house as close to the original plan as possible in case we don’t buy it and they have to sell the house to someone else.
As you can see there is a lot to consider in this process. In Part Two, I will discuss how we intend to proceed with upgrading our house. Stay tuned.