Buy your cottage and keep it, too

We just got back from our cottage on the Ottawa River.  It's wonderful there...  Wild windswept forest, water gently lapping onto the sandy beach (and mosquitoes the size of hummingbirds, but hopefully some long overdue hot dry weather will beat them into submission). 

I always know that summer's coming because the smaller members of our household start negotiating, "Can we go to the cottage tomorrow?  Why not?  Well, when can we go?"  And I find myself wondering, just how much school do those kids really need, anyway?

The reality of our situation however is that taxes, insurance, maintenance, and small renovations really tap into our cash flow.  In addition, with our busy jobs it's hard to get away as much as we would like.  So, like many people, we rent the cottage part of the summer.  It accomplishes two things: one, the rental income helps with our expenses, and two, we have wonderful renters who take care of the cottage as if it were their own, so that we don't have to worry that an empty cottage is just sitting there, vulnerable to thieves.

If you've been bitten by the cottage bug, or a vacation home is crowding in on your daydreams, you have probably realized another reality.  Nowadays, property prices have greatly increased in many of Canada's popular vacation destinations, making it a challenge to purchase the beach house of your dreams.

Some people choose to share these costs by renting, as we have, while others manage the cost through joint ownership with family or friends, or even some combination of the two.  However, before taking the plunge into co-ownership or renting, you need to be sure that you really understand what you're getting into.

Here are a few things to think about:

Does owning a vacation property fit your lifestyle?

In addition to the fun and leisure aspects of a vacation home it is important to factor in the time and cost involved in year-round upkeep. How will the property be used? If your dream is to own a ready-to-live-in relaxing hideaway while your co-owners dream of a northern DIY project, you may not see eye-to-eye when it comes to how you will be spending your weekends.

It’s important to think carefully about how much time you and your co-owners plan to spend at the vacation property. Will you be vacationing as a group, or do you want to trade off on weekends? Will one use the property more than the other? Will it be a 50/50 split?  

How will disagreements be resolved?  Can your relationship withstand potential friction regarding decisions involving money?

Have you thought about what’s involved before you put it up for rent?

While most Canadians buy a second home for recreational use, growing numbers are also buying for investment purposes. Determine in advance how you will split, and claim, the rental income. In the case of a vacation property that you intend to rent out most of the time, the lender may deduct the rental income from your total monthly debt payments when qualifying you for a mortgage. It is important to be aware that not all lenders will take rental income into account – a mortgage broker can advise you on this.   As well, if you do rent the property for the majority of the year, you may have additional expenses - insurance would be more expensive, and you may wish to consider using a property management company.  How do these fit into your spreadsheet?

Can you afford the financing?

While it certainly helps to go in with a co-purchaser, you want to be sure that your waterfront property isn't putting you underwater.  Seek independent advice on what size of mortgage you can reasonably handle - again, a mortgage broker can help you with this.  And as with any purchase, if you think you will need financing, make sure you get a pre-approval to ensure smooth sailing when you put in your offer to purchase.

Regardless of whether you are buying a cottage that you yourself will enjoy, or as an investment, some pre-planning will help make sure it is a relaxing and rewarding venture.  And don't forget your bug spray!

Image credit: [c] Daniel Steger for openphoto.net

Thinking of helping your kids to buy a home? Three ways to do it

Abigail Van Buren once said, “If you want children to keep their feet on the ground, put some responsibility on their shoulders.”

This holds true even once they’re grown. What better way to give responsibility to your adult children than by helping them to become homeowners?  Further, once your kids are old enough to go to university or first start working, they likely won’t have the funds to buy their own home, yet many of us feel that it is better to own the home we live in, rather than paying off someone else’s mortgage. So, how can this be accomplished? 

Here are three alternatives. Which is most appropriate for you depends on your financial situation and your lifestyle and retirement goals.

Option 1. Provide cash to your child as a gift, for a down payment on a home.

PROS: Your child can buy a home sooner, and start building up equity, rather than paying rent to someone else. If the amount of the gift is more than 20% of the value of the home they wish to buy, you enable them to obtain a conventional mortgage, avoiding mortgage default insurance fees.

CONS: You will have to provide a letter confirming that the funds are a gift, with no repayment required. The child is free to use the money as they choose.

Option 2. Co-sign on your child’s mortgage.

PROS: The mortgage will be obtained based on your financial circumstances. Your child may not have an established credit rating, high enough salary, or a proven track record of employment, to qualify for a mortgage. If your financial situation allows, you can co-sign or guarantee their mortgage. This may result in a better interest rate, larger mortgage amount, and a more ideal home for your child.

CONS: You will be responsible for paying the mortgage, if your child becomes unable to do so. As well, if you later need to borrow money yourself, the debt may impact your own ability to qualify for funds.

Option 3. Use your own cash, or equity you have available in your own home, to buy a home and have your child pay you rent.

PROS: If you feel your child is not yet ready to own their own home, for example, while going to university, becoming the landlord may make the most sense. Using money you have in the bank, or equity in your own paid-off home, you could invest in a rental property. If you do finance the purchase, your interest on the loan is tax-deductible since this is not your primary residence (and if you choose a home equity line of credit, all you have to pay is the interest).   Best of all, your child and their roommates will pay the rent to you, keeping the money in the family.

CONS: If you finance the purchase, the equity in your own home will be tied up and not available to you for your personal needs. The same holds true of you use your own funds. Also, if your child moves away, you might be stuck holding property in an area that was chosen only because your child was attending school there.

The key benefit in these scenarios: the help you have provided will keep money in the family, instead of paying someone else’s mortgage via rent payments.  Talk to your accountant or financial planner to review your options and ensure they are appropriate for your situation, and then enjoy helping to make your child a homeowner!

Photo credit: [c] Microsoft Clip Art

Five Steps to Making Your Dream Renovation a Reality

The lure of a stunning gourmet kitchen or sparkling spa-style bathroom may have you chomping at the bit to begin a home renovation. But if you heed the advice of experienced renovators, pre-planning and advanced preparation are the secrets to renovation success.

Here’s a helpful checklist to get your renovation started on the right track:

1. DECIDE WHAT YOU WANT TO DO

For most people, this is the fun part – flipping through magazines and watching home decorating shows to get inspired. But it is also one of the most critical phases in any home renovation.

2. PREPARE A REALISTIC BUDGET

Determine how much you are prepared to spend on your renovation. Remember to boost your budget by at least 10% for unexpected costs.

3. ARRANGE FOR FINANCING

Get financing in place early so that you can plan your renovation with confidence. Leveraging the equity in your home is often a good option. With a secured loan, you can usually obtain an attractive interest rate with flexible repayments. Other alternatives include refinancing your existing mortgage or arranging for a second mortgage on your home.

An independent mortgage broker can help by negotiatiating competitive financing with a number of competing lending institutions.

4. SELECT THE RIGHT TEAM

You’ll want to entrust your project to people known for their quality of work. Ask for recommendations from friends and family, interview prospective candidates, and I strongly recommend that you check references.

5. STICK WITH YOUR PLAN

Your contractor, who does the construction or subcontracts it to other trades people, will work with you or your designer to implement your plan. With a sound plan, reasonable budget, financing in place and a team that you trust, your renovation can get off on the right track.

What renovations are on your wish list?

Home sales down, prices up in April 2011

According to the Canadian Real Estate Association, home sales activity was down 4.4% in April 2011.  This softening was expected due to the tightening of mortgage regulations in March.

Home prices were up 8% compared to April 2010, buoyed by continuing increases of multi-million dollar home sales in Vancouver.  

To see the full article, click here.


Photo credit [c] Liz Orfao for openphoto.net

Rates drop - but only slightly

The bank posted 5 year rate has dropped from 5.69% to 5.59%. That .10% is not significant but it is allowing fixed rates to continue to edge down. Overall, rates are lower than they were a few weeks ago, and a lot of our lenders are beating the posted rate by 1.5% or more. 

It would be nice to see rates stay at these levels throughout the summer!

Mortgage and homebuying tools - free for the taking!

If you do a quick google search you will find that there is an overwhelming amount of information available for new homebuyers.  Save yourself some time and check out one of the best sites out there:  the CMHC website.  It contains literally thousands of articles on everything from homebuying to mortgages to renting and dealing with home ownership issues.  And it's not just in English; translations are available in French and eight other languages.

Check out this first time homebuyer video, then spend some time looking at the homebuyer guides, easy-to-use calculators, and of course, information about CMHC mortgage insurance.

I'm a big believer in getting educated.  Since a home purchase is the biggest financial investment most of us will ever undertake, it is worth knowing about a resource that gives you so much unbiased, high quality information about home buying.

Let me know what you think!

Top Homebuying Mistakes and How to Avoid Them

In the market for a new home in the next year or two?  Make sure you avoid these common homebuyer mistakes: 

Not getting a pre-approval.     The very first thing you should do before doing much more than glancing through the real estate section of the newspaper or online is to go to your mortgage broker or favourite lender and get preapproved for a mortgage.  For one thing, this tells you how much you can afford, so you don’t risk finding a house you fall in love with but can’t actually buy.  For another, it allows your mortgage professional to review your credit score and credit report.  If there are any problems with your credit, errors on the credit report (which happens more often than you might think), or your credit score is too low, you can then work together to develop a credit improvement plan.  This can take as long as two years, so the earlier you start, the better.  Your reward will be qualifying for the best possible interest rate on your mortgage and, therefore, saving money.

Not knowing where your down payment is coming from.     You will need anywhere from 5% to 20% of your home’s purchase price as a down payment.  Money in an RRSP (up to $25,000, for first time home buyers), money in bank accounts or brokerage accounts, or a gift from a family member are possible sources.  If you are putting down less than 20%, it’s called a “High Ratio” mortgage.  All this means is that the mortgage must be insured either through CMHC or Genworth, to protect your lender.  There are a few lenders that offer what they call a cash back mortgage, where you can get money on your closing date to help with closing costs, your down payment, or another purpose.  The bottom line, however, is that you will have to prove that you have a down payment.

Not budgeting for closing costs.     Don’t get caught forgetting about closing costs.  You will need  to demonstrate that you have at least 1.5% - 3% of the purchase price to cover costs including lawyer fees,  land transfer tax (including Toronto’s MLTT), home inspection, title insurance, interest adjustments, and other charges.   See my blog post about closing costs for more details.

Maxxing out on your home purchase.     We’ve all been there.  You’re out looking at homes, and you go see “the one” – the house with that perfect kitchen or the perfect yard for entertaining.  The catch is that it’s just a tad above your top price.  But if you tighten your belts, you could just about manage it, right?  Well, before you rush in, make sure you spend some time looking at something less exciting: the numbers.  If you have a pre-approval, you should know by now how much you qualify for.  Work through how each month’s budget would look like it you do max out.  Do you have any money left over for things like home maintenance?  Unexpected expenses such as a new roof or new car?  Fun things like travel?  And what happens if interest rates go up, or you or your partner don't get that expected bonus – will you still be able to afford the payments?

Hiding information about your financial situation from your advisors.     Often people will not disclose negative financial information because they are concerned that they will “look bad”, don’t feel it’s relevant, or don’t think it will come to light.  Unfortunately, surprises during the home financing process are usually not happy surprises!  It is better to be forthright about your situation.  There are very few circumstances we haven’t seen before, so we usually have a solution!

Changing something about your financial picture before closing on your home purchase.      Remember that you have been approved for your mortgage based on a certain set of financial circumstances – income amount, employer / self-employment information, current debt load.  Do not run out and sign for a new car lease, or quit your job to start a business, or anything else that impacts the set of numbers you provided when you applied for your mortgage!

Feel free to call me to discuss your options.   In the meantime, I wish you smooth and surprise-free home buying.

Photo credit: [c] ComputerHotline for openphoto.net