Mortgage 101 – What Happens After The Smoke Clears

Todd Veinotte and Clinton Wilkins discuss the impact of recent fires on insurance costs, noting that insurance premiums have risen due to increased risk factors.

Impact of Fires on Insurance and Housing Costs

Todd Veinotte
Welcome back to Mortgage 101, your guide to home ownership, with me, Todd Veto and our mortgage guru, Clinton Wilkin. Clinton, fire, fire, fire, right? I mean, my gosh, everybody’s on edge right now about these fires.

Clinton Wilkins
I think the country’s on fire. Newfoundland fires, Moncton area, and the Bayers Lake one this week was scary. That was too close to home. That reminded me, really, of the fires here.

Todd Veinotte
Two years ago, or three years ago? 2023? That was very bad.

Clinton Wilkins
So, insurance is impacted by this because there’s a risk factor. I would think that insurance costs at some point need to be fat or not. At some point always needs to be factored into some people’s mortgages, not what their budget is, but their housing costs, their housing costs, their operating costs of their home. And insurance costs have been rising. There have been a lot of claims here from floods and fires, and even the rates for auto insurance are very high. They’ve increased a lot over the last couple of years which is a problem. And when we’re talking about inflation, it’s not just gas and groceries; it’s all these other tertiary things that are impacting our budget on a day-in and day-out basis.

Challenges in New Home Construction

Todd Veinotte
I would think that the construction, new home construction in particular, would be going up big time.

Clinton Wilkins
I think the cost of construction is very high from a labour perspective and a material perspective. I don’t think the materials are as expensive as they were in that thick of COVID. Remember, they were just like, they were insane, drywall and lumber just went like, through the roof. I think they’ve re-normalized. And I think having that supply chain and that kind of worked out has helped. But we’re not out of the woods when we’re talking about trade with the US. I think that a lot of the supply now, we’ve started sourcing these things from other places around the world. A lot of stuff is still coming from the US, but the tariffs are a concern.

Todd Veinotte
Okay, we’ve talked about new home construction before. It’s not for everybody. Some people don’t have the stomach for it.

Clinton Wilkins
It’s not for the weak of heart, that’s right. And it’s not for the people who are really on a tight timeframe. I think the builders are getting better again, but again, when the market is more balanced, it’s easier for things to be in a better place. I think the labour market is still very hot, and I don’t think there are enough workers here to be able to support the demand. I think we could build more if we had more skilled tradespeople.

Todd Veinotte
So you say it’s not for the weak of heart. Explain why.

Clinton Wilkins
Buyers sometimes can’t get out of their way. See the change orders that come through the scope creep. People change their minds, and that’s really where builders are making their money. They’re changing the whole scope of the project sometimes, and they’re adding things, deleting things. That’s where the cost sometimes gets out of control.

Todd Veinotte
How does it work? How does the mortgage lending work? Because the builder wants some money.

Clinton Wilkins
It’s usually the majority of the ones that we get involved with right now, today. I’m not saying forever, but today, the majority of the ones that new construction that we get involved with are turnkey, so it’s based on a contractual price. But then there are clauses in the contract that one the builder can charge you more based on inflation or cost of goods, or whatever, or changes change orders within the agreement. So people are choosing to change the cabinetry, or change the flooring, or change the heating system, I’m talking about. We’re getting into extreme changes now, but borrowers are changing things all the time, and sometimes I see 10%, 20% plus change orders compared to the purchase price.

Red Flags with Contractors

Todd Veinotte
So when it comes to red flags, perhaps with contractors, who to use, who not to use? What? What advice do you have because you hear horror stories, sometimes about bad contractors?

Clinton Wilkins
Sometimes, the big ones are bad, let’s be honest. The size doesn’t necessarily matter when it comes to contractors. I think it’s talking to people who have received a product from them and getting some referrals. Check out their actual work. Because let me tell you, there are some big contractors. And I mean, we have 20 – 30,000 clients that do some shoddy work. I’ll be honest with you, I’ve heard the horror stories, and sometimes it’s not necessarily the contractor. Sometimes it’s that the project manager doesn’t get along with the realtor, doesn’t get along with the buyer, and that creates friction, and then their perception is, hey, this builder is not good. It could be a great builder. But again, it comes down to the people that you’re dealing with every single day. So I think it’s really about getting the feedback from people that they’ve done business with in the past, right? I think a track record is very indicative of what will happen in the future. Can somebody be their general contractor? I mean, in theory, they could, but probably not doing the type of turnkey that we’re talking about. They would need a draw mortgage. In that case, we’ve paused doing draw mortgages for the last couple of years. It’s a pain in the butt for borrowers; for the lender, there aren’t very many letters that will do a draw, specifically a self-built. We’re going to be launching it again here in the fall. But the last couple of years, we basically said to anybody who wants to come and get a draw, we’re not offering this. We’re too busy. We don’t have enough manpower. We don’t have enough time to be able to do it. And we were just trying to keep our heads above water. We are going to relaunch a product with a few lenders in Nova Scotia and New Brunswick, starting in September. So a lot of them are a little teaser.

Todd Veinotte
Okay, what do you mean? Give us a little more detail; you can’t just throw.

Clinton Wilkins
So we were not doing land loans. We were not doing draw financing for the last two years. Maybe three years. So, draw financing means the contractor doesn’t get paid at the end. They get paid in little bits, little increments, based on the amount of work they did. Hence, the work because somebody’s got to verify that work’s been done. It’s a more costly type of financing. So when someone does turnkey, they’re like, Well, I don’t want to pay detransfer tax, I don’t want to pay the builder a higher price. It usually probably works out to be the same, and the risk is then on the builder. That’s why turnkeys are much more popular than draw financing, and that’s why lenders don’t want to do draw financing, because what happens, Todd, if you decide, hey, you’re building a house, and you drop dead. The bank’s left holding the bag for a half-built house. Nobody wants that.

Todd Veinotte
So when it comes to how far in the future you’re going to build that, that matters because the contract is going to charge you a certain amount based on carrying costs exactly, and what could potentially go up because they have to cover their butt.

Clinton Wilkins
Oh, they’re hedging. They’re hedging. Exactly. And that’s why contractors are building homes. They want to make money. It’s a business.

Markups and Risks in New Home Construction

Todd Veinotte
What type of markup are you? Are you talking about new builds?

Clinton Wilkins
I think these contractors are making a minimum of like 10% over 10% but 10% isn’t that much money. When we’re talking about one little thing that goes wrong, that 10% gets eaten up quickly. Some of them are making 20% some are making 5% who knows? But I think the average is probably about a 10% profit. But we’re talking about building five, $600,000 homes. Okay, that’s 50 – $60,000, a profit.

Todd Veinotte
When you think about the amount of risk that you’re taking.

Clinton Wilkins
Huge, huge risk, huge risk. And that’s where people who want to do dry financing, they’re like, I want to save that 50, $60,000 while these builders are building every single day, you’re building a house, maybe once or twice, or three times in your life. Not sure, like, what is your track record, even if you work in the industry, about building a house, start to finish?. I’m I, and I’ve seen so many builds go sideways. I’ve been involved with them myself. I have had a negative experience with building homes, and I built a couple; I would think twice before building another one. I’m not saying I will never do it, but I will have to be really I will take a second thought before I decide on building another house. And that’s from someone who works in the industry, and I’m dealing with builders and lenders and lawyers every single day.

Todd Veinotte
So the builders must have, obviously, they’re carrying a lot of credit themselves, right?

Clinton Wilkins
They’re building, they typically would have, like a whole program with a lender to build, maybe some spec build some at this level, oftentimes they’re getting their financing based on building turnkey. If they’re doing a one-off draw financing, the borrower basically is the lender. The borrower is giving them a deposit. Once they get to one stage, giving them more money, they get to another stage, giving them more money. And typically, the builder will then get credit from these subtrades. So in terms of draw financing, the contractors aren’t holding that much credit. Most of the risk is on the homeowner. And again, if something goes wrong with the homeowner themselves or the builder, you can be in serious trouble.

Todd Veinotte
How do people get hold of you? Clinton people listening, interested in hearing or getting more info from you?

Clinton Wilkins
They can check us out online at teamclinton.ca/radio; there are hundreds of blog posts on there. There are links to our Spotify and Apple Music. You can hear our podcast, and you can also check us out on social media, on Facebook, on Instagram, on TikTok, wherever you want to consume your social media, we’re going to be there. And reels, oh, reels on Twitter, we are big in all the types of social media, and they can also shoot me a message if there’s anything you ever want us to talk about on our show. We love getting the feedback on back in. In, and we’ll be on CityNews as well, and the next time the Bank of Canada meets.

Todd Veinotte
Thanks so much, my friend. All right, that’s Clinton Wilkins Mortgage 101, Your Guide to Home Ownership. Thanks, everybody for listening.