Keeping up with mortgage payments is an important part of home ownership, in addition to property taxes, insurance and maintenance. But what happens if your roof suddenly needs replacing, the foundation springs a big leak or the furnace gives out in the middle of a cold snap?
Your mortgage can be structured to deal with such unexpected home expenses. You can also borrow against the equity in your property or take out insurance to deal with mechanical failures.
"Planning for 'what ifs' is critical," says David Cole, an RBC mortgage specialist in Burnaby, B.C. He adds that mortgages are an especially important area of financial planning, given that houses present significant expenses as well as assets, and much can go wrong with them. "The last thing you want is to have a home be an anchor for you."
A roof collapse from an overload of snow or a toppled tree might be covered by homeowner's insurance. However, anything that falls under the category of maintenance, however significant, is your responsibility to absorb.
Many homeowners faced with major repairs or improvements opt for a home equity line of credit, which allows them to borrow against the equity in their home. Such loans have no carrying costs or fees, are flexible in terms of what they can be used for and carry relatively low interest. The RBC Homeline Plan, for example, is set at prime plus half a per cent.
A home-secured loan is available only to those with at least a 20-per-cent down payment or 20 per cent equity in their property, meaning the total amount borrowed cannot rise above 80 per cent of its value.
If your home equity is less than 20 per cent you may need to refinance, which brings additional costs including setup and legal fees for re-registration and mortgage loan insurance. Borrowers also could apply for an unsecured loan or line of credit, at a higher interest rate.
Mark Kerzner, president of TMG The Mortgage Group Inc., a national mortgage brokerage, says that on average, one third of funds borrowed when mortgages are refinanced is spent on home repairs and renovations.
One reason people need to refinance is because they end up getting in over their heads, Mr. Kerzner says. The total debt-service ratio, a combination of the payments on your mortgage and all of your other debt, should not exceed 40 per cent of your gross income, he says.
If you have costly repairs, most mortgages allow you to skip a monthly payment once or twice in order to free up cash, although Mr. Kerzner notes that this adds to the principle outstanding.
You can also reamortize so that your payments are reduced. This can provide wiggle room when times are tight, Mr. Cole says, but will lengthen the term of the mortgage.
Home buyers can protect themselves against costly repairs with a thorough home inspection. "It's key to know what's coming down the pipe," Mr. Cole explains. "Make sure you don't have a sinkhole."
If you think you may have extraordinary costs ahead, your mortgage adviser may help you work out a bigger loan, holding some funds in reserve in anticipation of extra costs.
Mark Salerno, a corporate representative for the Canada Mortgage and Housing Corp. , says that if you have a sense prior to closing that major repairs will be required, one option is a "CMHC Improvement" program. This allows lenders to offer greater financing choices to borrowers who plan to undertake small- or large-scale improvements that will ultimately increase the value of the property.
When the home inspection is performed, ensure that you're in the home so you can "see it through the expert's eyes," he recommends. "It can be hard to know what the words on the page mean."
Once you move in, keep up with general maintenance and ensure everything is in good working order, says Tim Bzowey, the vice-president of home and auto for RBC Insurance. Homeowner's insurance will pay for unforeseen disasters, but there's "a threshold of reasonableness and judgment involved," he says. For example, a roof collapse preceded by leaking and water damage won't be covered. "It's about being prudent and using some common sense."
Mortgagors insist that homeowners have the right insurance in place, covering all buildings, contents and liability, Mr. Bzowey says. Review your insurance coverage annually, keep a list of your home's contents off-site and update values.
Mortgage insurance is available, although most policies are a form of life or disability coverage and apply only in the event of a death, job loss or critical illness. Some lenders or manufacturers may provide warranties or niche insurance products on specific mechanical equipment in the home. But these often require annual inspections and maintenance of the furnace or hot water tank in question, at a price, and can come with hefty premiums.