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Purchase Plus Improvements

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” allow homeowners to renovate a newly-purchased or refinanced home, or build a new one, and roll the cost of the improvements into the balance of the mortgage. This allows homebuyer’s to benefit from the low interest rate associated with a mortgage, and the simplicity of one mortgage payment, while putting down less than 20% of the home’s ‘as improved’ value.

To acquire this type of mortgage, the first thing you must do is make the offer conditional on 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 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.

While newly constructed homes may receive up to four monetary advances before the home is completed, with refinanced or newly-purchased homes, CMHC only advances up to 95% of the original value. You must be prepared, then, to finance the renovations and improvements up front, keep all your receipts, and await reimbursement after the renovations are complete and the lender has time to evaluate the as-improved value.

If you’re thinking about performing 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) — a low-interest line of credit that is secured against your home.

Example:

Usual way of financing:

Purchase Price
$150,000.00
Less 5% down payment
$ 7,500.00
Plus 2.75% CMHC/GE premium
$ 3918.75
Total Mortgage
$ 147,131.25
Mortgage payment @ 4.75%
$ 830.86/month

Purchase plus Improvements:

Purchase Price
$150,000.00
Proposed Improvements
$ 8,000.00
AS IMPROVED VALUE OF HOME
$158,000.00
Less 5%of as improved value
$7,900.00
Financing required
$150,100.00
Plus 2.75% CMHC/GE premium*
$4127.75
Total Mortgage
$154,978.25
Mortgage payment @ 4.75%
$875.17/month

In this example the you are able to personalize the home to suit your needs and improve the value of your home, without waiting until you could afford to do the changes.
* The CMHC/GE premium used in these calculations is for a 25 year amortization. 0.20% will be added to the CMHC premium for every 5 years of amortization beyond 25 years.

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