Purchase Plus Improvement Mortgage

Many buyers when searching for homes for their families often have to either settle for a home that is really “not up to snuff” or they buy a home that is a bit out of their budget.

I have often said that just because a mortgage broker says your maximum purchasing price is X doesn’t mean that X is actually an affordable mortgage for you, when you consider all your other non-housing expenses.

One way to get around the affordability conundrum is to buy a home that although structurally sound, needs a lit bit of love ‘aka’ renovations. The problem is that renovations cost money, which is not always readily available. In comes the Purchase Plus Improvement Mortgage.

How it works

This mortgage allows you to borrow up to 10% of the post-renovation value of your home up to a maximum of $40,000.

For instance, let’s assume the purchase/asking price of a house is $360,000 (virtually impossible in the GTA but if you go far out enough or look at other provinces, you might) but post renovations that house could be worth $400,000. That means you could borrow *up to *$40,000 towards renovations.

Before you put an offer on that house and apply for a purchase plus mortgage, there are a few steps you must follow.

  • Get a written quote from a contractor regarding the cost of the renovations you intend to do on the property. This means the seller must allow the contractor to inspect the property prior to you putting an offer in to properly estimate the cost of the work required.
  • Both the mortgage insurer (CMHC, Genworth or Canada Guaranty) and your lender must approve the work you plan on completing. Your mortgage broker (we) can assist with this.
  • When putting in your offer, make sure you put in a financing condition that your purchase plus improvement mortgage is approved.
  • You will need to have access to funds to complete the renovations first before the renovation loan is refunded. This could be through a separate line of credit.

Using the scenario above, although your purchase offer will be for $360,000, your actual mortgage will be based on $400,000. Your down-payment requirement will also be based on this amount.

Upon closing, the lender will pay off the seller and hold $40,000 in-trust with your lawyer. Once the renovations are complete, an appraiser will be sent to your home to inspect the work done and once they are satisfied that work has been completed, the $40,000 will then be released to you.

Mistakes to avoid

Although there are renovations you want to get done, be mindful that not all will be approved. You will have to stick as close to the original quote that was approved by your lender as possible.

The renovations being done have to actually *increase *the value of the home.

If you need to change contractors, meaning the person who completes the job is different from the original quote you received, you will have to get approval from the lender first. Otherwise, your renovations may not be approved. The contractor must be approved first.