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Purchase Plus Improvements (Renovation Mortgages)

If you have your eye on a fixer-upper, or are thinking about building your dream home, financing your endeavours may be easier than you think.

“Renovation Mortgages” give homeowners the ability to renovate a newly-purchased or refinanced home and roll the cost of the improvements into the balance of the mortgage. This allows the homebuyer to benefit from the low interest rate associated with their mortgage. It also provides the simplicity of one mortgage payment and requires less than 20% of the home’s ‘as if improved’ value for a down payment.

To acquire this type of mortgage a buyer must first make the offer conditional using a renovation mortgage program such as CMHC’s ‘Purchase Plus Improvements’ program. The next step is to acquire at least three quotes from contractors to determine the cost of the renovations. CMHC will approve a loan of up to 95% of the ‘as if improved’ value of the home, or the value of the newly constructed home, provided the money you’re putting into the home does, in fact, improve the value.

There are a few rules to remember. Newly constructed homes may receive up to four monetary advances before the home is completed. Refinanced or newly-purchased homes will only get one advance for 95% of the original value. In this scenario, you must be prepared to finance the renovations and improvements up front, keep all your receipts, and await reimbursement after the renovations are complete. The lender will have to evaluate the “newly improved” value once all the work is done.

If you’re thinking about doing renovations on a new home but you’ve put down more than a 20% down payment, consider taking advantage of a Home Equity Line of Credit (HELOC). This is a low-interest line of credit that is secured against your home.

Some Examples:

Usual way of financing:
Purchase Price: $300,000.00
Less 5% down payment: $15,000.00
Financing Required: $285,000.00
Plus 3.15% Insurance premium: $ 3918.75
Total Mortgage: $293,977.50
Mortgage payment @ 3.5% $ 1,467.74/month
Purchase Plus Improvements:
Purchase Price: $300,000.00
Proposed Improvements: $20,000.00
AS IMPROVED VALUE OF HOME: $320,000.00
Less 5% of ‘as if improved’ value: $16,000.00
Financing Required: $304,000.00
Plus 3.15% Insurance premium: $ 9,576.00
Total Mortgage: $313,576.00
Mortgage payment @ 3.5% $ 1,565.59/month