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.