Buying a brand new home is a dream come true for many people. It is an easier way to buy new without going through the hassle and time-consuming process of buying land and building your own custom home. Buying a new build means you will have less say in the construction and design of the home but will also mean a lot less grunt work for you. However, you will still have many decisions to make with a new build such as:
- Choice of lot
- Choice of layout, the model of the home
- Choice of colours and certain materials
- Choice of finishes
- Choice of upgrades
Some builders even offer a buyer the option of having the basement finished as well. The builder will also offer some sort of warranty as well as The Ontario New Home Owners Warranty Plan.
What Is a Mortgage?
A mortgage is a loan given to you from a lender to help you buy a home/cottage or another type of property. A mortgage is secured by the home/cottage or the other type of property. There are certain terms and conditions set out in the mortgage agreement that the buyer must meet and abide by. Lender’s terms and conditions can vary from lender to lender.
When purchasing a new build, the mortgage for this type of home is often referred to as a completion mortgage. With a completion mortgage, the builder is not paid until the buyer takes possession of the home. However, the buyer will still be required to make a down payment, which can sometimes be payable in installments. The completion mortgage is usually finalized 30 days prior to the possession date of the home.
The advantage of a completion mortgage is the buyer’s ability to make certain changes to their mortgage prior to 30 days before closing. A completion mortgage allows the home buyer, upon approval to increase the mortgage amount to cover any additional upgrades to the home. It is important to remember once you have applied for and been approved for a mortgage of any kind that you do not make any large changes to your job or financial situation. You must stay within the lender’s guidelines to avoid the mortgage being revoked. The following information is required from the lender for a completion mortgage:
- Signed purchase agreement
- Specification or feature sheet
- Construction Specs and floor layout and exterior view
- New Home Warranty Registration number
Many lenders offering completion mortgages want completion of the home within 120 days. Typically a lender will offer a rate for a period of 120 days, should the rates go down during that period you will get the lower rate. However, if the rates go up during the 120 days you are protected at the rate the lender has offered you. Completion mortgages offer no more risk to lenders than conventional resale home mortgages as they do provide the funding until the deal has closed. A completion mortgage differs from a resale home mortgage as a new build completion mortgage is arranged in advance.
Types of Mortgages For New Builds
There are several types of mortgages for new builds. These types of mortgages are very similar to resale home mortgages but are usually arranged well in advance of the closing date.
An open mortgage on new builds and resale homes allow you the flexibility to pay your mortgage off sooner without additional penalties. With an open mortgage, you can make prepayments or extra payments which allows you to pay off your mortgage much faster. The interest rate on an open mortgage is typically higher than a closed mortgage. However, the advantages far outweigh the difference such as:
- Add additional money on top of your current mortgage payment without penalty
- The ability to renegotiate your mortgage prior to the end term without penalty
- The ability to completely pay off your mortgage before the end term without penalty
- The ability to change lenders and break your contract before the end term without penalty
A closed mortgage usually offers a lower rate of interest, however, you are limited on the amount of prepayments you can make without penalties. Also, keep in mind, not all closed mortgages allow prepayments, it depends on the terms of your mortgage. A closed mortgage is beneficial if you plan on staying in your home for the full term of the mortgage and do not plan on making any extra payments. Penalties will apply if you break your mortgage contract prior to the end of the term or if you make a prepayment that is higher than permitted in your mortgage contract.
Variable Rate Mortgages
With a variable rate mortgage, interest rates can fluctuate. Variable-rate mortgages are usually at a lower interest rate than a fixed-rate mortgage. It is extremely important to keep an eye on the interest rates on a regular basis. When the rates go down, you pay the lower interest rate, however, when the rates go up you will also pay the higher interest rate. With a variable interest rate mortgage, usually you can lock in at any time at a fixed-rate mortgage. This type of mortgage is beneficial if you have the time to regularly monitor the mortgage rates. You have the option of having a fixed payment with a variable rate mortgage or adjustable payments with a variable interest rate mortgage.
A fixed-rate mortgage interest rate will stay the same for the entire term of the mortgage. This is a good choice for those that like to know exactly what they will be paying each month.
Interest Rate Protection
Some lenders will offer an interest rate cap or a convertibility feature to protect you from rising interest rates. Speak with your lender to see if they offer either of these.
It is easier to get a mortgage on a new build through a builder than a construction mortgage to build your own home. Buying a new build through a builder presents a brand new home, with much less planning and hassle than custom building your own home.