The story is often the same. You find the house you’ve been searching for in the neighbourhood of your dreams, but it needs some updating or personalizing via renovations that you aren’t sure how you can afford. What if you could add these renovations to your mortgage, have it all at the great low rates that a mortgage offers, and all in one payment? Well you can with a Purchase Plus Improvements mortgage!
The Purchase Plus Improvements mortgage can be insured (CMHC/Genworth/Canada Guarantee) or conventional with many lenders. It allows borrowers to add up to the equivalent of 10% of the purchase price in upgrades or renovations that will add to the value of the home. Borrowers can then get financing up to 95% of the ‘as improved’ value (or 80% if conventional). The key here is that you have to make sure you either have access to funds to ‘float’ the reno until you get the extra money from the lender (as it is held back by the lawyer until the work is completed), or your contractor needs to be okay with getting paid once ALL of the work is completed (this means that if you are getting Jim to do the bathroom and Richard to do the flooring, they both have to be finished before either of them get paid). I often recommend that people get a ‘do not pay for 6 months’ from a local box store, then they can pay it off in full, before the interest charges accrue, once the lender releases the extra funds.
Here’s an example:
Purchase Price: $340 000
Renovations: $34 000
‘As Improved’ value: $374 000 (note that the new lending value is generally derived on a dollar for dollar basis, depending on the proposed renos)
Down Payment (5% of total): $18 700
New Mortgage: $365 079 (including mortgage insurance premium)
In this example, the client was able to add $34K in improvements to the property and only increase their out of pocket, via the down payment, by an extra 5% (or $1700).
In the end, don’t let a little imagination get in the way of your dream home. If you see the potential, there is a way to get it done without breaking the bank (no pun intended!).