Mortgages: The Broken Tool Canada Needs

You can qualify for a mortgage that will pay for the house you really want here in Canada, but you won’t get the money for it if there is something already there. Why not? Because lenders are too scared.

You know what you need and want in terms of living space. If you don’t, lots of people can help you design it and get plans approved. There are even people who can help you find a place for it, too. Heck, you can even get people to build it for you. BUT if an old, decrepit house stands in your way, no one will lend you the money to make it happen because the existing house punches a hole in the deal - not just the land!

That’s right. So, let’s say you qualified for a traditional mortgage amount equal to 80% of the initial buy, the cost to demolish the old house, and all building costs. A mortgage is based on there always being collateral, something that can be sold to guarantee lenders can always get their money back in a pinch. They need this, but how can they have that right after demolition when there is nothing there to back their investment? Lenders lose their collateral - traditional mortgages break that way.

If it was a straight up mortgage with renovations, fine, dip into savings, cash in on favors, and get a mortgage. No problem. If you want to get creative, get a home equity line of credit (HELOC).

For an empty lot, fine, have at least half the land value and get rolling with a construction mortgage that rolls over into a regular mortgage. No problem.

With an existing structure that needs removing, there will be a point in the process where there is nothing there - and lenders do NOT like that.

But very big builders can buy it for you, demolish what is there, build the house you want, and then you go the traditional mortgage route to buy it from them. But only if it is an uber-design house costing in the millions, otherwise it is not worth their while. Plus, you exclude 95% of construction-related businesses out there in the process. (Can you say ‘fair’?)

You could always just have some money on hand at-the-ready. So how much would it be? Just add up the following:

1. All closing costs for the initial purchase - you cannot escape that; plus
2. Whatever the initial purchase price is minus half of the land-only value; plus
3. The entire first phase of construction (probably 20% of the total estimated build cost); plus
4. 10% of phase 2 of construction; plus
5. Unexpected cost overruns.

You need all of that UPFRONT. At a minimum. In your pocket (so not a loan of any kind).

But the Canada Mortgage and Housing Corporation (CMHC) can provide security. To help buy existing buildings sure, but not for demolitions. The CHMC’s programs are geared to helping put people into homes, not creating holes in the ground.

But existing dilapidated houses aren’t worth anything. Wrong. Even if uninhabitable, those “structures” are not nothing and things that are not nothing have some value. So, you will definitely pay more than the land value as a result.

But a dilapidated house is just a box, surely sellers will reduce the price to match. Well, imagine a house that has been in the family for decades. Try selling those memories for next-to-nothing and feeling okay about it. Besides, the vast majority of home-sellers typically want to get as much as they can out of the sale of their house to cover other costs in life - not just for bragging rights.

The solution can be simple. Use a “blanket mortgage” to give everyone what they want. To be frank, the only person who is not currently getting what they want out of such a mortgage is the lender, specifically from the point of demolition to the point of reaching 90% completion of the build. That’s the only piece that’s missing.

Who else is already getting what they want?

• Home-sellers via their asking price
• Real estate agents with their commissions
• Architects, builders, and inspectors with their fees
• Various levels of governments through tax revenues (which increase if a house becomes more valuable)
• The economy at large given the number of companies that can be involved in the replacement of aging houses (and aging houses will only grow in number)
• The environment (assuming you bother to build your house to code)
• The person who, way later on, inherits or buys the house you will build (since it will be built to last)
• You with the house you want AND, if applicable, the resale value you want

If financial instruments are designed to play music to get everyone on the dance floor, then why leave lenders on the side wishing they could partner up? They can make the money they need to make, but only if they are covered throughout the entire process. The boost they need is between demolition and completion, plus the coverage they need decreases between those two points.

Clearly, the market can come close to, but still comes up short on, designing a tool on its own through no fault of its own. I must ask, is there any value with families, couples, and individuals buying up old houses and having businesses of all shapes and sizes thrive by demolishing, designing, and building new ones?

Do cities want to look better?

Do governments want higher employment and tax revenues?

Do you want to get the house you want?

These questions are linked, but don’t ask a bank for those answers.

Is anyone even looking into this? Ask any publicly-funded organization and you will be dismayed.

----------------------------------------

If you have really liked what you’ve read, please share with your friends (email, text, or social media). As always, feel free to check out other things I have written here on Vocal.

Thank you!