Your new-home construction requires the right mortgage and insurance policy, among other financial considerations. Here are some tips on how to navigate the process when smart-sizing your life in B.C.’s smaller communities.
By Tracey Rayson
Even before you secure your approved builder or general contractor, an architect and a lot, consider not just how to pay for it, but how to cover all your financial bases. Here are some smart strategies from the experts.
One of the biggest homebuyer traps is preparing an “idealist” budget. Jarfan Amjad, a mortgage specialist in mobile lending with Coast Capital Savings, emphasizes, “the importance of making a realistic budget within your means: we complete a feasibility sheet on the project to ensure there is a healthy equity gap between what we are lending and what the member is putting in, so there’s no hardship, at any point, between the member or ourselves.”
He recommends a contingency fund of five to 10 per cent of building costs, for overruns. “Include the furniture and appliances cost in your budget as well,” Amjad advises. “In certain cities, municipal approval for the final occupancy requires you to have your appliances installed.”
“Build for resale” is his other advice, even if you think you’re creating your forever home. Everyone has unique space needs and design preferences, but “consider future value and what will appeal to a prospective buyer down the road, so you can recoup top dollar on your investment,” says Amjad, who finds that the average person stays in a home for 10 years.
To cover the complexities of financing your new build, you’ll need a construction mortgage from a reputable lender. Construction mortgages for the full required amount are given to you in stages called “draws.” You make payment draws (usually four to five) to the builder at predetermined levels of completion on the home’s construction: land purchase (optional), foundation, lock-up, drywall and occupancy or final. Prior to each draw, the appraiser checks that the builder is following the new-home warranty policies and verifies completion levels before funds are released.
On Vancouver Island, CIBC’s Mike Oleksiuk, a mortgage advisor with construction mortgage accreditation, says, “We do a lot more due diligence on a construction mortgage. We work with the builder and client to come up with a progress draw schedule, and then we compare it to the builder’s contract, which shows the build costs including construction allowances.”
Homeowners should expect the unexpected when building a home. “We like to see 20 per cent down, although we could make it work with less with the proper due diligence so the client would not run into cash flow issues during the build,” says Oleksiuk. Interest rate holds are another form of assurance for buyer and lender. “We can hold current special rates that can be guaranteed up to 36 months.” With a Progress Draw Mortgage, buyers only pay interest on the amount drawn to date.
FINANCIAL SAFETY NETS
Ensuring sufficient insurance coverage is critical during the home-building process. Coverage for the structure while under construction is referred to as Builder’s Risk or Course-of-Construction insurance. “Ideally, the policy is set up when ground is broken, but no later than when framing starts, and runs through to the occupancy permit,” says Gloria Summerville Nikkel, senior customer service representative with Westland Insurance.
If the property owner has existing residence insurance, there is typically premises liability coverage already in place for your new-home build location,” she says. “Most policies will cover personal property in transit between locations; however, new appliances and other contents purchased in advance of the move-in date will not be insured at the construction site, so separate storage insurance may be needed.”
While it might be possible to extend your existing residential insurance policy to cover storage or in-transit items, she advises to always check with your broker to ensure you’re fully covered.