Building a new home? Read these 3 tips to ensure you're financially prepared.

When shopping for a home, there are a slew of options available, everything from detached homes, split-levels and duplexes to condos, apartments and townhouses. And within those options is the decision whether to build new or buy an older home. I'm going to focus on what the three main financial decisions you'll have to make when building a new home.

The three main areas of focus, from a financial perspective are:

• Your Total Cost
• The Type of Mortgage your Builder Requests
• Selling your Existing Home

Total Cost

This is probably the biggest point when deciding to build new. Building a new home is probably going to be more expensive than buying an older home. That almost goes without saying, since if you buy anything new from a new car to a new phone, you'll generally always pay more for a new product or service. The question is how much more. The big two areas of focus are on Upgrades and GST. When purchasing a new home, builders will often offer base models and you have the option to upgrade almost anything depending on your builder. You can upgrade the countertops, flooring, paint colour, the list goes on. This is where sticking to your budget is so important because once you see the glitz and glamour of new homes, it's so tempting to upgrade everything and blow right through your budget. The goal here is to be disciplined and spend money on the items that will create value for future resale. So, feel free to spend some money on the kitchen, bathrooms and general structure and layout of your home. Skip the fancy fixtures, high-end paint options and over-customizing the home. The next big cost when building a home is GST. Since GST is only charged to new homes, you pay an extra 5% (In Alberta) for your total cost of your home. You do not pay GST on older homes.

Here is a quick example of what the total cost could look like on a new construction home:

Purchase price $400,000 (Base price of home)

Plus upgrades $75,000 (upgrades to flooring, windows, countertops, appliances, structural etc.)

Subtotal $475,000

Plus GST $23,750 (5%)

Total cost $498,750

That is almost $100k more than you may have anticipated up front. Now, you don't have to upgrade anything and save the $75k in the above example. My experience tells me that most people upgrade, this isn't the standard. Stick to your initial budget and you'll be fine!

Type of Mortgage

There are two types of mortgages banks offer and builders can request. One is a completion mortgage and the other is a progress draw mortgage.

A completion mortgage is your standard run-of-the-mill mortgage, where the bank provides financing on the possession date to the customer seeking financing. The builder would use their own funds to build the home and pass that cost down to the customer. Your first mortgage payment won't occur until usually one month after possession or whatever frequency period you have selected. There are no additional fees involved. It's pretty straight forward.

A progress draw mortgage is much different, because the builder is seeking the banks money to build the home, not their own. So, the bank will offer draws to the builder based on the progress of the new construction. For example, CIBC offers draws at 33%, 66% and 99% complete. And the cost of each draw is a different interest rate from the final mortgage rate you end up paying once you move in. It's usually offered at prime plus a certain percentage. And here's the most important part- you have to pay interest on each draw as they are advanced until the construction is complete. So, if the total cost to build your home is $300,000, for example, and each draw is $100,000 ($100k @ 33%, $100k @ 66%, and $100k @ 99%) and the interest rate is prime +3% on the draws, which today that is 6.45% (Prime = 3.45%), you would be required to pay about $538 per month ($100k x 6.45%/12 months) until the next draw is advanced. The cost is cumulative so your monthly interest payments will go up as each draw is advanced. Now, if your builder is flexible, they can offer to pay for the interest for you but this isn't standard so be sure to ask. There is also usually a bank fee for draw mortgages since it involves sending out an inspector multiple times to the property to confirm construction progress. That cost can be around $500-$1,000. Some lenders will cover this for you, so be sure to ask your mortgage professional. So, as you can see if your builder is asking for a draw mortgage and they won't cover the interest cost for you and your lender won't cover the additional fee, you will end up paying additional costs during the construction part of the build that can take up to 12 months or longer that you didn't anticipate.

Selling Your Existing Home

The last major factor to consider when building a new home is what you're going to do with your existing home. If you're currently renting, then ignore this section. But if you currently own a home with a mortgage on it and need to sell that home to purchase the new home, you'll have this condition on the mortgage approval. And most builders will not accept a conditional mortgage approval based on sale of another home. In my experience, this isn't a hard and fast rule but it's also not typically favoured by builders. So, if you have to sell your home to qualify for the new home, be sure to ask your builder up front before you sign anything if they are OK with a conditional approval based on the sale of your existing home. If you don't need to sell your existing home to qualify for this new mortgage then it's a matter of logistics of when to list your home for sale in anticipating of taking possession of your new home. Or if you plan on keeping your existing home and renting it out as an investment property, then you'll just need to coordinate your new tenants and a move-out date etc. Your Mortgage Professional should run through all options at the mortgage pre-approval stage to prepare you for all eventualities- and if they don't, find another Mortgage Pro to do this for you.

Building a brand new home can be an exhilarating experience. You are in total control of where you want to live and what your home will look like. You can make almost every decision with the help of your builder sales team and design team to customize your home and make it truly the home of your dreams. And if you stay within your predetermined budget, you will be able to enjoy your home and the cost that comes along with it for many years to come.

To set up a pre-approval appointment to find out your options, please contact me directly.

Thanks for reading.