I don’t know about you but I am growing tired of the media telling us how high interest rates will become in a year or two. They keep writing in the papers about interest rate calculations affecting your mortgage payment if the prime rate goes up by 5%. Some of them even push the limit saying that the prime rate will be 7% within 5 years… how the hell would they know? Did they tell the world in 2003 that prime rate would it 2.25% for 18 months in 2008? Who was right back in 2003? Please, give at least one name!

So today, I’ll do something different. I’ll use the very same math to perform interest rate calculations that affect your mortgage payment, but on the other hand. Since the mass media always tend to show you how much you *might* pay if the prime rate goes up by 2% compared to a fixed rate, let’s take a look at how much you *paid* in excess since 2008 compared to a fixed rate.

So let’s take an easy example:

Mortgage; $200,000

Amortization: 300 months (5 years)

Negotiated 5 year Fixed rate: 3.85%

Negotiated Variable rate: P+0 = 2.25% for the first year, now at 2.50%

Before I start with my calculation, you can argue that you were been able to lock your 5 year rate at 3.69% or even lower, but I could argue back that some of my clients are paying way less than P+0, so let’s keep it this way.

So during the first year, you would pay $12,430.08 in mortgage payments if you had taken the 3.85%. With the variable rate of 2.25% during the first year, you would have paid $10,454.64… so 2K less for the first year.

Let’s assume that the prime rate will go up during the next 12 months with an average of 3% (which includes that it increases from 2.50% to 3.25%). Your mortgage payments will go up to $11,357.88 for the year. So you will be saving another 1K during this year.

So you start year 3 by paying 3K more in interest with your fixed rate or by applying the very same 3K on your mortgage to create a safety net. Let’s assume that you just took the 3K in your pocket and you keep the same strategy (either paying 3.85% fixed rate or 3.25% variable rate). And let’s imagine that the prime rate goes up to 4.50% (with an average rate of 4%). Your mortgage payment with this new interest rate increase would be $12,624.48.

So after 3 years, and a lot of interest rate increases, you have still saved a total of $2,853.32. So let’s push the interest rate higher to 5.5% with an average of 5%. Mortgage payments for the year totals $13,958.52.

So after year 4, your overall mortgage payment is still lower and you have still saved $1,324.88.

When we look at this scenario, you will be a loser if interest rate keeps increasing for 5 years in a row which is unlikely to happen. And if it does, you will have lost about $1,000 compared to the fixed rate. Then, if you keep with the variable rate for another 5 years instead of locking a very high 5 year term fixed rate (because if Prime = 5%, the 5 yr fixed rate could be around 7 to 8%). You are almost sure to see a decrease in interest rates during the next 5 years since we always go through economic cycles.

Final thoughts on interest rate calculations and mortgage payments

Based on these calculations, I am a firm believer in the variable rate but by simulating 5yr fixed rate mortgage payments. i.e. , you pay low interest rates (prime) but you make higher payment (simulate it a 4%). Therefore, you are building a huge safety net to compensate if the variable rate goes higher.

See, the future is not always black when we talk about variable rates

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We had a great debate during last week’s post about big cars and money. It is quite interesting to see other people’s point of view about what they are driving and how much money you think they make. However, I was also surprised to see how many people thought that they can get a return on investment (ROI) for their renovation costs (or actually: expenses). It seems as if people believe spending money on their home should be considered as an investment.

Sure improving your house is a great thing, I had actually dropped $10,000 into my basement and I was happy to do so. I’ll be moving again soron and I will surely put a tidy some of money into my next house too. However, I don’t see it as an investment per say. In my opinion, renovating your property will serve a few purposes such as:

- being more comfortable in your home

- keeping your house up-to-date (who wants to have a kitchen sraight out of 1970?)

- keeping the value of your house (when renovating is not an option anymore)

- increasing the value of your house (when you are making improvements).

However, while the latter is true, you won’t get a great return on the cost of your renovations. In fact, when I dropped 10K in my bathroom and my children’s playroom, I didn’t expect to see my 10K grows to 10.5K or 11K in the span of a year. However, if you invest the same 10K in a business or in the stock market, you will expect to get a least $500 in growth at the end of the year (if you are not investing in 2008 ).

So I went a little bit further in my research about return on investment (ROI) for renovations costs. I went on a few realtors’ websites, home staging tips and finally ended-up on the Appraisal Institute of Canada. This is a self-regulated organization that is reputed to be the most authoritative voice in terms of house evaluations.

They seem to be less than excited about the return on investment for renovation costs too. They even mention the following:

“If the value of your house exceeds the average market value in your neighbourhood, your renovations will not yield much return. But if your house value is below the average, you can recover a larger part of the renovation costs.”

Factors influencing the return on renovations costs

There are a few reasons why you won’t get a positive return on your renovations costs. Among them, there are the value of your house compared to your neighbourhood. For example, in my area, having a oversized ceramic shower became the norm in the new constructions (2007 and recent). Since mine was a 2002, I didn’t have one. When I put $5,000 to finish my bathroom in my basement, I made sure to include a huge ceramic shower. However, this improvement was just bringing my house up to the “average level” of the newer ones. Impossible for me to get back the full $5,000.

The other factors could be lack of taste or choice of materials. You can surely import your marble kitchen counter from Italy and pay $15,000 for it, it doesn’t mean that someone else is ready to pay for your exotic tastes. This is why renovating doesn’t always rhyme with improving .

Also bear in mind that the amount spent on renovation projects should be relative to the value of the dwelling: A $30,000 remodelled bathroom does not belong in a $100,000 house.

If you are looking at what to renovate this summer, here is the list of the top home improvements trends:

SEVEN hot home-improvement trends
- Home theatre
- Hardwood floor in kitchen
- Laundry room on main floor
- Whirlpool bath
- Built-in kitchen appliances
- Office on the ground floor
- Kitchen island

And if you are still not convinced that you cannot get an decent return on investment for your renovation, please see this guideline provided by the Appraisal Institute of Canada on return on renovation costs:

Percentage recovered upon resale
Kitchen upgrade: 75% to 100%
Bathroom upgrade: 75% to 100%
Interior painting: 50% to 100%
Roof replacement: 50% to 80%
Replacement of furnace or heating system: 50% to 80%
Expansion (addition of family room): 50% to 75%
Doors and windows: 50% to 75%
Deck: 50% to 75%
Installation of hardwood floor: 50% to 75%
Construction of a garage: 50% to 75%
Fireplace (wood or gas) 50% to 75%
Central air conditioning: 50% to 75%
Finished basement: 50% to 75%
Wood fence: 25% to 50%
Interlocking paving stones on driveway: 25% to 50%
Landscaping: 25% to 50%
Asphalt driveway: 20% to 50%
Pool: 10% to 40%
Skylights: 0% to 25%

So, is improving your house is an investment or an expense?

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This will be moving time for me in less than 2 weeks! We are going to the notary this week and next week and moving on June 12 and 13^th. Time flies big time! So it was time to call for home insurance… and try to save money!

Last week, I called my current insurance company to transfer my home insurance to my next property. I always hate going through this process since it takes a good 30 minutes to answer questions on the phone: what is the size of you home? What year it was built? What kind of heating do you have? Etc…

Since I was going to lose so much time on the phone, I thought of taking an additional 15 minutes and ask more questions about how to save money on home insurance. The girl was nice enough (I’m lucky these days to get nice people on the phone!) to answer all my questions. While she wasn’t able to give me a savings estimate according to each tip to save money on my home insurance, I found this conversation pretty helpful.

So here are a few quick tips to save money on your home insurance

Before we start with items over which you may have control, there is one thing you have to take into consideration: the insurance price starts with where you buy. The location of you house is very important. If you buy a property in a area with a higher rate of crime, your insurance will definitely be more expensive.

Credit Score

A few years ago, insurance companies started asking to for access to your credit bureau before giving you a price on your car or home insurance. The reason is quite simple; research has proven that an individual with a great credit score is generally more cautious in all aspects of his life. Therefore, he has less risk of having a car accident or a fire in his house. So when the insurance company requests  your permission to look pull out a credit bureau you are better off saying yes if you know that you have a good credit score. This could help you save a few hundre bucks on your home insurance.

Cost of reconstruction

Based on the size of your house, the insurance company will assume a cost of re-construction if your house ever burns down. Obviously, the higher the cost, the higher the premium. You don’t have to cover the full cost of the price you are paying because you won’t have to replace the land (hopefully!). Therefore, you can try to decrease the cost of construction by $10,000 for example.

Reducing fire hazard

Living near a fire station, having smoke detectors and fire extinguishers will also help reduce your home insurance premiums. On top of that, having extinguisher available at home can be very useful for minor incidents!

Upcoming renovations

If you are buying a house that needs some serious renovations, the insurance company will take into consideration the risk of “rebuilding a part of the house”. If you have trouble with the foundation or you need to replace the roof, you will pay a higher premium.

Alarm system

I always knew that having an alarm system was probably the easiest way to save on home insurance but I had never thought it would be that much of a difference! I would have paid $1,300 per year to be insured without an alarm system. If I get a home security system installed, I will enjoy a rebate of $200 per year! This is 15% off!

I have taken a look at different promotions offered by known alarm companies:

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Last week, I wrote an article about how you should never trust a realtor. I don’t want to be mean but I truly have the feeling they are they only for their pay check. Technically, they are not responsible of anything and they don’t have to do follow-up with clients (since they will probably forget about their name at the time of selling their property 10 years later!).

So today, I’m doing a follow-up on my certificate of localization story. After writing this post, I came into my office, closed my door and started to call everybody.

Note to myself: trying to solve a bureaucratic problem on a sunny Friday morning is a lot of work!

I started with the company who did the certificate of localization to know what were my options and to see if the 12cm could be argued based on the fact that the pool was at 1,5m and its last pole was at 1.38cm…

The receptionist told me that all their experts were either not working or on the road (read they were having a coffee and donuts right behind her but didn’t care to pick up the phone because it’s Friday!). So I couldn’t get any help from them until Monday… Fine!

Then I call the notary to advise her of the situation. I must admit that I was very tempted to “hide” this glitch and just put the certificate of localization in an envelope and give it to her saying “everything is fine”. I thought I had good chances that she would not even take a look at it (I don’t trust notaries either… lol!). But I have figured that I was better off telling her what was the problem upfront in order to avoid further (bigger) problems with my buyers (who are seeking for money back on holes in the doors!).

The notary told me that she would give me her opinion once she has received the certificate but didn’t seem to be worried too much about the pool. She told me that it was quite frequent and not to worry about it… right…

Since I wasn’t satisfied, I have decided to give a call to the municipality in order to prepare myself for a minor derogatory. I spoke with the guy at the city and he asked me if I had a inground or outground pool (huh?). It appeared that the 1.50m rule was for inground pool only and that outground pool has to be at 1.00m from the fence… HURRAY!

So all this to tell you that I will still sell my house on time and I will not have to move my pool around! I guess that you are never better served than by yourself

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As I am writing this post, I can tell you that I am so upset that I am blue banana (this is one of my colleague’s expression ). On this very rare occasion, I really don’t feel like laughing or smiling. I have actually had to re-write this first paragraph 5 times to make sure it is appropriate for public consumption (this is why the blue banana came out!).

Last Thursday evening, I was watching my Montreal Canadiens dominated by the Pittsburgh Penguins and as they scored 2 goals out of nowhere to run away with the game, I was reading my certificate of localisation.

Right after accepting the offer on our house about a month ago, we realized that the certificate of localisation had to be updated since the one we had did reflect the current situation (we added cedars on one side of our land). However, we also noticed that we didn’t receive a valid certificate in the first place since the pool was not on it.

Back when we bought this house, we were pretty young (I was 25) and didn’t have much experience with these details. To be honest, back then, I didn’t even know what a certificate of localisation was for and the impact it has on a sale of house. Beside showing a small drawing of your house on a piece of paper, I couldn’t see anything else.

When we bought the house, there were 2 realtors implicated (the seller and the one we used to buy the house). They both told me that all the documents were in order! Since we had 2 realtors involved, I didn’t see it until we signed at the notary (lawyer). And even then, I didn’t realize anything, I was just super happy to buy my house and I trusted the “professionals” to prepare the transaction (professionals my …..! they really thought about their commission, and nothing else!)

What is a certificate of localisation?

The certificate is a very very very (did I write very) important document. It actually confirms that everything built on the land was done according to municipal laws. Therefore, they identify your house, patio, pool, fence and any other construction on your property. They measure to make sure that they don’t incur any problems and that they have been placed and built according to the laws enforced.

So you can imagine how important it is to have an updated and compliant document before buying a property. In fact, if the certificate of localisation is not compliant, this can delay the sale or even cancel it.

So it appears that my pool was installed at 1.38m from the fence!

And, obviously, the municipal rule for pool is 1.50m! So we are talking about a difference of the size of my hand! I think I am going to kick someone… the problem is that I don’t know who! I do deserve a good kick in the butt (but I am already got a slap in the face!). But the 2 agents and previous owner deserve the very same kick as well!

The most frustrating part is that they have to take the furthest post of the pool structure to make the calculation. Actually, the “pool” is at 1.50m, but there is a post that is closer…

What are my options?

I don’t know yet…. I am writing this article in the bus the morning after finding out that I there is a huge problem that is my responsibility.

I will now:

- call the guy who did the certificate to see if we can do anything

- call the notary to get her advice on the problem

- call the city to ask for a 12 cm exception!

- call a pool installer to move it by 12 cm if my 3 other calls don’t produce any bright ideas

- call the guy who did the certificate back so he can issue another one

- write a tons of checks to pay these people

- call one of my lawyer friends to see if I have a case against the previous owner.

- call the previous owner and let him know that he has a bill coming his way.

- get my money back

- drink a nice glass of wine on my new terrace of my new house ‘cause I will solve the problem this very morning!

More info on my situation to come soon…. ARGH!

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