By Finbar Garcia LUTCF, FSS, MFA
For many of us, dreaming of your first home brings so much joy, but have you really examined the entire process? Some families may want to buy while others would decide to build. Whichever way you look at it, you must understand the process involved. So, let’s get down to it.
Buying a house
You must first start with the location. Where do you want to raise your family? What was your experience as a child growing up where you lived? Should it be the same or better for your family?
Location will determine the cost of the house, so choosing an area that is both comfortable and cost effective is key. You must also look at the travel distance to your employment and the schools within the area, as these can have a financial impact going forward.
Let’s look at the financial factors. While most financial institutions offer competitive interest rates on mortgages, a main concern is if the interest is fixed for the period of the mortgage or would it increase over time, as this would create an increase in your instalment.
Next, you need to know what the down payment is. This is usually ten per cent of the value of the house. You can make a “balloon payment” towards the principle amount you borrowed, thereby either reducing your monthly instalment or payment period. This can mean paying off for your house much earlier than the original period, saving on the interest.
Most banks would use your home as the first measure of security towards the mortgage. While this is the norm; it should not be the only method. I strongly advise that you and your spouse (if any) have life insurance equal to the value of the house, so if anyone should die during the mortgage payment period, the bank can use the life insurance proceeds to liquidate the mortgage, thereby releasing the house from any debt. The type of life insurance policy you choose is also particularly important. Now to the instalments.
Your debt servicing ratio should be around 40 per cent of your gross income (single or joint) as this is a factor when the banks are reviewing your loan application.
If your ratio is much higher due to other monthly commitments, the bank may ask you to make a larger down payment or to consolidate any existing loans with the mortgage or payoff these loans. This would free up any other monthly loan payments.
So now you are pre-approved for the mortgage. The bank would need a copy of the sale agreement as this would outline the cost and terms of the sale, the down payment you made to the seller and the period that the mortgage should be closed— this is usually 90 days.
There are other legal documents and title searches that you would need to furnish the bank along with their attorneys. This is to make sure that the property you are buying belongs to the seller and there is no lien on the property from another bank or lender. There may be other related fees and charges by the bank that you need to know.
Once a deed is to be issued for the property, the bank’s attorneys would have to be paid for their service. Also based on the value of the property, stamp duty must be paid. These can be large sums of money separate from your down payment.
The banks would also need to have a Fire Homeowners Policy which would ensure that the house is covered in the event of a fire and other perils. Remember, the banks must secure their investment just as you need to secure your family from debt or eviction caused by your lack of having adequate life insurance.
Building your home
Some persons may have inherited a parcel of land or even bought the land some years ago with the intention of building their dream home. This land, once it’s fully paid for and free from any debt, can be used as first security to borrow from the bank to build. This process takes a different approach.
Doing this, you would need to have approved building plans from the relevant authorities. You will also require a quantity surveyor to manage the cost of the project and a qualified building contractor to give you the labour cost and time frame for completion.
The approach from the bank would be to do a Bridging Finance Loan. This means that they hold the land, lend you money to build and draw down on a phased basis as the project moves along and the quantity surveyor submits his/her report to the bank.
You will be paying interest only on this loan for the period of the construction. Once the house is completed and a completion certificate is obtained and a valuation done on the finished house, the bank converts the loan to a full mortgage for a specified period.
With both scenarios, there may be other documents needed, some setbacks may pop up and some frustration could set in. You would still need to fulfil both the banks’ obligation and your peace of mind in securing both life insurance and fire insurance to avoid any unforeseen circumstances.
“The doors to your dreams are not always visible, and the only way to see them is to create them” – Steven Aitchison.
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