Thursday, July 2, 2009

Mortgages - what do you have to ask? And some of Tim's thinkings about money!

We had a meeting tonight with Karen from Vision Mortgage Solutions. Sat down for an hour or so to ask some basic questions about the ideal kind of mortgage for us.

Basically, we're planning to pay off the mortgage as soon as possible - I guess that's what most people aim to do; especially when you think that on a $250,000 mortgage over 30 years at about 5.2%, you actually pay back around $490,000. That means on a loan of $250,000, you pay $240,000 extra in interest charges! Guess you can't blame the banks for wanting to make a few bucks, and when it comes to your house, you don't really have many other options.

But think about it - if you bought a car for $50,000, would you want to pay $90,000 for it? Car loans are higher than mortgage loans, but for a shorter term - a key difference is that the basic asset (the car itself) is going to be worth much less than the total sum you pay for it including loan interest. For example, the $50,000 car you pay $75,000 to own is then worth $30,000, to pluck a few figures out of thin air! The motto? Buy the cheapest, crappiest car to drive that your ego can afford, unless you're able to get some other sucker to pay at least some of it for you (for example, salary sacrifice if you're a standard wage slave, or buy a McLaren F1 if you're sitting at the top of the big table!). Then again I shouldn't really give advice to buy a crappy car, as last year I imported a Skyline GTR which I drive maybe one a week or fortnight or so... more on that later!

Right, kind of off-topic.. but basically the reason why we accept mortgages on houses is that at least the basic asset should appreciate (go up) in value. For example, you might buy a house for $300,000, pay it off for a few years, then sell it for $400,000 capital gains free 3 years later(if you've lived in the house - investors need to cough up more tax to our wonderfully non-corrupt government bodies *cough*). Sounds great, doesn't it? You've had a roof over your heads, and made $100,00 tax free! To make the maths simple, let's say you've made 30% gain over 3 years. But let's say you'd put that $300,000 into an alternative asset - let's say you bought shares. And you held it for 3 lucky years, and sold your shares for $600,000 3 years later. That's 100% gain (less capital gains tax at your applicable rate)!

Why the higher rate of return? Basically, the universal rule is that the greater the risk, the greater the reward. Safe as banks? 4% return, only just ahead of inflation. Safe as houses? 6% or so - but your house might not go up in value, or your wonderful tenants might trash the place. Safe as shares? -100%, +100%, +500% or more?

Not quite sure how I got started on all that, but anyway I meant to talk construction mortages. Those of you building a new house on land you own or have paid off already, need to ask the right questions!

Builders generally want staged payments, roughly 20% at each stage of construction. Ensure your lender acknowledges this, and find out what additional fees (if any) apply. For example, you may need to pay $100 every stage payment in various fees and inspection appointment costs.

Lenders may also require a complete signed contract and building approval prior to approving the loan. With Metricon, you pay a 5% deposit at contract signing, before building approval is applied for. Where does that 5% come from, if the lender won't approve the loan without building approval? Ask the right questions!

On that theme, on the unlikely (but not impossible) event that you've paid 5% for contracts and building approval is not immediately forthcoming, what does that mean for any loan you plan to apply for?

What if you have an existing loan for the house/land - is it worth talking to your existing lender about a redevelopment loan or extension of your existing mortgage, or moving to an entirely new lender? Beware of break fees - money you pay, to avoid paying more money to a bad lender.

Anyway, Karen was great to talk to, and she came out in the evening to our place to talk things through. We're going to talk to a couple of other brokers to see what they have to say, but if anyone wants Karen's number, add a private comment with your email address and I'll get back to you. In fact, if there's any random things you want to ask, just comment below and I'll try to get back to you or blog about it. I've already contacted one reader who's also building a Nolan (Hi Newt!) and hopefully we'll discuss more specifics about Nolans as time goes by.



  1. Hi Tim,

    For those reading this post they should also consider the flip side of the coin with regards to paying off your mortage quickly.

    Let me first say that I do not disagress with what you are saying but that there is an upside to not paying your martage of quickly.

    I won't go into all the details but the capital you put into a mortage is only good if A, you sell the place, or B, if you redraw on the capital in the mortage. Both have a downside in the A, requires you sell your home and you will then have to buy another one. And B, results in your mortage increasing.

    The alternative is to pay off as much as possible in the first few years. This capital can then be used as assurance on an investment property, that if geared correctly, with pay off your home quicker for you rather than you using your own cash. This strategy does not use your home as assurance but rather the capital only. this mthod also has massive tax benifits.

    One great book to read on this topic is called 'How to create an income for life, Positive cash flow property' by Margaret Lomas. It might no be for everyone and is best suited to those who can manage money well.

    Just something else to think of. The basic concept is that you are paying your house off with other peoples money and have a larger asset pool at the end rather than just one house that you might not want to sell.

  2. Hi Tim and Tina,

    I was just browsing the net and found this blog. Very interesting that you guys have built the Nolan in whitehorse. We are planning to do exactly the same, a knockdown rebuild in whitehorse and we quite liked the Nolan as well (still undecided about 41 or 45). Can I ask how much it finally cost you to build the entire thing (all inclusive). We have got indicate numbers from Metricon but I wanted to touch base with as many people as possible before approaching the bank for a loan. You can send me an email at



  3. Hi M - Not much point quoting figures, since we built our house, the base price of the Nolan has gone up about $60,000.

    Add $50,000 to the base price of a house for basic upgrades (inc site costs for a redevelopment), $100,000 for midrange upgrades, and if you want a Metricon display-home type result, add $400,000-$600,000 (seriously!)




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