The cost of owning a home

Two weeks ago, my tenant messaged me that there was water all over the floor in my suite.

It took a few minutes to trace back the source of the leak. We ended up having to open up a wall to see what was going on.

I’m not a plumber, so bear with my rough explanation here.

The main pipe that drains all of the water (and I do mean all the water) from upstairs and connects to the city sewer system had snapped. I’ve been in the house for almost 11 years and have never had an issue with this.

I’m still not sure what caused this to happen now.

The water that leaked ran under the flooring and wicked up into the drywall and the base of the kitchen cabinets.

We dried up and bleached the affected area and removed a section of the wall that was damaged.

During the last two weeks while I waited to see if my home insurance was going to cover the damage, I’ve done a fair bit of thinking.

I was thinking about the “what if” scenario – what if insurance didn’t cover the remediation and repairs?

I calculated the cost of the materials to replace the flooring, drywall, and the cabinets in the kitchen. I did my best to estimate the cost of the labour to put the suite back together.

This has been a great reality check for me.

When I work with first-time home buyers, part of what we talk about is lifestyle.

I work through the numbers and go over what they qualify to borrow and what their potential price point should be. We talk about different types of properties available: single family homes, condominiums, town homes, etc.

Then, we dive into actual costs involved with each type of property, as well as homeowner responsibilities for each. We discuss the advantages and potential disadvantages of each type of home based on my clients’ lifestyle and support system.

So back to my plumbing challenge.

I am fortunate that I have a friend who is very handy and works in a trade related to plumbing. He was able to temporarily patch the pipe for me and help with the initial clean up and demolition.

  • What if you have no support nearby?
  • What if something like this happens unexpectedly?
  • Are you living paycheque to paycheque? Or do you have an emergency fund to cover a late-night call out for a plumber?

Maybe buying a property at a lower price point is a better option so that you are able to have savings to deal with unexpected issues that come up.

Maybe looking for something smaller and newer is a better fit for your lifestyle and skill set.

Alternatively, maybe you are really handy and have family and friends nearby to help you with emergencies or renovations.

Whether you are getting ready to buy your first (or next home), it’s a great idea to sit down and think about:

  • What your true costs will be and how that figure fits into your monthly budget
  • Whether home will just be a place to land between social activities or whether you love to work on home improvement projects
  • Your need for privacy and personal space
  • Location as it relates to work, school, etc.

It has been interesting to see how conversations with my clients have changed as COVID carries on. I am seeing more clients wanting to spend time and money working on their homes as they have more time on their hands.

I am also seeing clients who are able to save more for their down payments as their social activities have changed over the last few months.

If you are thinking of making the leap to home ownership, do your homework. Spend some time considering the “what ifs” that may happen down the road.

Is it time to renovate?

During the past few months, I’ve noticed an increase in the number of clients looking to finance home improvements.

A friend who is a general contractor has also noticed an increase in the number of calls he’s getting for renovations and upgrades.

If you have equity in your home and the numbers make sense, it is often possible to refinance your current mortgage to add money to cover the cost of updates and renovations.

The first thing I look at is how much equity you have in your home. For refinances the maximum amount you can borrow is 80% of the value of your home. If you already owe more than 80%, you won’t be able to add additional funds.

The next thing I look at is your current mortgage. I check to see if you will incur a penalty for re-writing your current financing, and if so how much.

This is important because some lenders offer no-frills mortgage products at a slightly lower interest rate (usually .05% lower), but those mortgages come with a larger penalty for making any changes to the mortgage partway through the term.

In an ideal situation, we work with your current lender to add funds to the current mortgage as opposed to seeking out a new lender. If we are able to do this, many lenders will offer a blended rate on the new mortgage so that you don’t pay a penalty for making changes.

Having said that, one of the things I do is consider what the potential penalty will be as compared to the interest savings of going into a new mortgage with current interest rates.

Lately I’ve worked with a few clients where it made sense to pay the penalty and take a whole new mortgage.

If you are considering adding money to your mortgage for renovations, my recommendation is that you spend some time thinking about the scope of work you plan to do.

Make a detailed list and do your homework to see what you are looking at in terms of time and cost.

Will you do the work yourself or hire someone to do it for you? If you are hiring someone, I suggest you build in a buffer above and beyond what you are quoted in case there are cost overruns.

Older homes can come with surprises once you start opening up walls or trying to move plumbing.

Once you’ve put together a plan and a budget, I start looking for the best fit mortgage-wise.

You need to qualify for the new mortgage so will be asked to provide documentation confirming your income and the value of your home. Most likely we will need to order an appraisal.

Once the lender has had a chance to review the appraisal and confirms there is enough equity in your home, you will sign a new mortgage agreement with your lawyer or notary.

Once this is finalized you will receive a draft or trust cheque and you are off to the races. Or the hardware store.

People have different opinions as to whether refinancing your home is a good idea or not. An advantage to going this route is that the costs of the renovation are built into your mortgage, so you are paying a lower interest rate and have lower monthly payments.

The down side is that you are amortizing the money over a longer period of time.

If you choose to finance renovations on credit cards or credit cards, theoretically you will have the money paid off quicker.

In practice, that doesn’t always happen. The best approach to financing home renovations is different for client.

As COVID continues to affect our day lives, it seems people are spending less money on entertainment and eating out and more time at home. I think the trend of spending more money on home renovations will continue.

I love working with clients on these projects as I often get to see the before and after pictures. I’m inspired to get going on projects around my own home.

If you are thinking about home renovations and needing financing to do them, a quick conversation will let you know if adding money to your mortgage is the right way to go.

Co-signing a mortgage

As mortgage qualification guidelines have tightened over the last few years, I have seen an increase in the number of people co-signing for family members, and families purchasing homes together.

I have mixed feelings about going down the road of asking for a co-signer while working on a mortgage application.

If all goes according to plan, buying a home with a co-signer can be a brilliant fit. Sometimes life happens, and things can go very sideways for co-signors.

From my perspective, one of the key things I consider is the exit strategy for the co-signors.

Over the last few months I’ve worked with several clients who needed co-signers to qualify to buy their homes. In each case, there were slightly different reasons that the clients had challenges qualifying on their own:

  • One borrower was in a casual position with only a one-year history at the hospital. As an RN, she was working full time, but had no guaranteed hours.
  • Another borrower had no credit history as all of the family credit had been in her ex-husband’s name
  • One family’s ratios were too high due to a large truck payment
  • A single mom had some bumps in her credit history as she had to deal with extraordinary medical and travel expenses to care for her child that had to be at B.C. Children’s Hospital six times a year for treatments while he was younger
  • Despite carefully managing their money and saving their down payment over the last 10 years, another family only qualified to borrow about $300,000. There was nothing suitable at that price point in our housing market

In each of these situations, I was confident that with some time each of the clients would be able to qualify for their mortgages on their own.

  • For the first client, once she had either a two-year history of income in her casual position or a guaranteed full-time position, we would be able to remove her co-signer
  • For the newly divorced mom, we are working together to help her build a credit history of her own so that once she has a proven track record her co-signer can be removed from the mortgage
  • For the third family, they had another year and a half on their truck loan. We have a plan in place to revisit their application as soon as the truck has been paid off.
  • As her son has grown older, his health has improved so trips to Vancouver are few and far between. She has a better paying position at work and is meticulously managing all of her credit. Early 2022 we will be connecting to remove her co-signer
  • For the last family, once their youngest child was in school full-time the mom went back to work full-time. We will be revisiting their application next fall

So why am I particular about requesting a co-signer?

If 2020 has taught us anything, it is that life can throw us curve balls.

Despite our best-laid plans, sometimes things don’t come together as anticipated. This could happen in each of the above situations. Work situations change, unexpected health issues arise, vehicles kick the bucket, and turning finances around can be more challenging than anticipated.

What can this mean for the co-signer?

Co-signing for someone else’s mortgage means that the new mortgage payment is factored into the calculations for any of your future credit applications. This means that the sooner your name is removed from the application, the better.

If the person/people you have co-signed for run into financial difficulties and are unable to make their mortgage payments, you are fully responsible for covering them. If they default on the payments, this can affect your credit history as well.

There are some important considerations to think about before you ask someone to co-sign for you, or if you are being asked to co-sign:

  • Is there a clear exit strategy for the co-signer?
  • Are there potential any tax implications down the road with this property? For instance, might there potentially be capital gains to deal with?
  • Does everyone have wills in place to address what happens if someone passes away?
  • What is the plan if the primary borrowers are not in the position to remove the co-signer down the road? How might this affect family relationships?
  • Do the primary borrowers have adequate insurance in place to help sustain them in the event of death or disability?
  • If its been a while since you did a mortgage application, things have changed. You may find the process onerous. You will be asked to provide full financial disclosure and documentation to support your application.

If you are asked to co-sign on a mortgage, I recommend the following:

  • Seek independent legal advice so you fully understand what you are signing up for
  • Have difficult conversations upfront to talk about what your expectations are in terms of how long you want to be committed to this mortgage, and what will happen should the primary borrowers not be able to remove you from the mortgage down the road
  • Make sure you have access to online information to periodically check and make sure mortgage payments are being made as agreed

If you’ve made it this far, you are probably thinking I am against using co-signers with my clients. That is not the case. There is a time and a place, and having co-signors available has made home ownership possible for many families that might not otherwise qualify on their own.

I do feel, however, that it is extremely important that if you are considering co-signing for someone that you go in with your eyes open and fully understand what you are signing up for.

How not to buy a home

There are a few dos and don’ts when you start down the road of buying a home.

Over the last month and a half, I have been working with a great family relocating from northern B.C. to the Okanagan. Their mortgage journey has been hands-down the most stressful one I have ever worked on.

I’m going to share their story to, I hope, save you (or someone you know) the expense of sleepless nights and ulcer medication.

First, a bit of context.

A few years ago, a broker friend shared some of her handouts with me. One of the pieces was titled something along the lines of The Ten Mortgage Commandments.

I had seen these points in similar handouts a few times, and initially thought my clients might feel offended by the tone of the message. Then, with more experience, I realized why a mortgage broker somewhere along the lines put the information together.

I wrote a column about this almost exactly three years ago and then revisited it two years ago, so if you are in the process of buying a home you may want to have a quick look.

Back to this family.

They had been in limbo for almost two years waiting for their home to sell. They finally had an offer and were excited to move on with their lives. They had been maintaining two households — the move was an amazing work opportunity for her in Vernon.

Once the offer on their home came in, they connected with a broker they knew. He did an application and gave them a maximum price point to look at.

They went shopping and were excited to find a beautiful home just under this price cap.

They wrote an offer and waited expectantly for their approval.

Two days before their subject removal date, their broker told them there was no way to get an approval unless they came up with a significant amount more as their ratios were too high.

The realtor they were working with on the purchase called me and asked if there was anything I could do to save the home for them. I said I would see if there were any options available for them.

I did find a mortgage product that would work and worked quickly to get them an approval. They were able to get a two-day extension on their subject removal date.

The particular lender we had to go to does not work particularly quickly, so although we had an approval prior to subject removal, there were still conditions outstanding that needed to be confirmed by their lender.

The sellers were not willing to grant another extension to the subject removal date. They were understandably concerned that my buyers might not actually get financing in place and they would have then had their home tied up for almost a month and missed out on other potential buyers.

On subject removal date I had a long – and I do mean long – conversation with my clients about the implications of removing the financing subject without all the conditions being signed off.

We went over the conditions one by one. I needed to know they clearly understood what still needed to be finalized. I was very clear that they needed to stay status quo with their employers as the approval was based on both of their incomes.

No spending any of the money they had tucked away.

At this point, they were emotionally invested in this home as it checked all of their boxes and it had been a very two long years of waiting to get to this point.

His comment to me was “we’re going to roll the dice and see what happens.”

They signed off and made their offer to purchase firm. No backing out now without the risk of losing their deposit and potentially being sued. Closing date was three weeks away.

I followed up the next week to get a copy of his first pay stub once he was back to work (seasonal work that was gearing back up for the winter). I asked when I could expect it. He said “never.”

He said he didn’t quit, but wasn’t going back to work. He had interviewed for a better job in Vernon, which paid considerably more so it made sense to them to jump on and him move to Vernon sooner rather than later.

The new company made a verbal offer, which in his mind was good enough. The HR person then went away for a week. The week turned into two as the HR person lost one of her parents and needed time to be with family.

The clock was ticking and now we had no old job and no new job.

These purchasers were extremely fortunate to be working with exceptional realtors on both sides. The sellers agreed to extend closing for two weeks to allow my clients to get their ducks in a row. 

The new employment letter finally came five business days before the new closing.

For two final, added twists: when they set the new closing date my clients didn’t realize that the husband would be sent out of town for work with his new job. He needed to co-ordinate signing legal documents in another community at month end, which is a busy time for lawyers and notaries involved in real estate.

He also had to make arrangements to wire transfer their down payment from a small northern credit union to their lawyer. That week, the credit union had transitioned to a new phone system and he could not get through to anyone due to a glitch in the system.

I am pleased to say that their mortgage did fund in time to close on their revised closing date.

This is not the ideal home-buying experience. A great deal of stress for all could have been avoided had they read and followed the Ten Mortgage Commandments.

So I get it. I get how this list evolved, and am now sharing it with all my clients.

They will be celebrating Thanksgiving in their new home. I’m grateful that everything lined up for them.

From my home to yours, wishing you a wonderful Thanksgiving.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit www.okanaganmortgages.com

Visit their blog at www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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