What is a Renovation Mortgage - Purchase Plus Improvement Mortgage!

Are you looking to buy a home, but struggling to find one that is up to your standards? Perhaps you have found a great location, but the property needs a bit of updating or renovations. In that case, a purchase plus improvements mortgage could be the answer to your problems!

This article will provide you with all the information you need to know about the purchase plus improvements mortgage, including how it works, the three main programs available in Canada, and the best tips and strategies to get the most value out of the program, without any additional stress or cost on your part.

How the Purchase Plus Improvements Program Works in 7 Steps

The purchase plus improvements mortgage is a program that allows homebuyers to include some home improvement costs into the mortgage amount. Here are the seven steps to follow when using the purchase plus improvements program:

1. You can get a mortgage approved with as little as 5% down payment, and include some home improvement costs into the mortgage amount.

2. When applying for a purchase plus improvements mortgage, the contractor’s quote for the work to be completed should be provided upfront with the offer to purchase the home. In other words, before you complete the purchase offer, you need to have a contractor quote outlining the work to be done and what the cost will be.

3. The contractor’s quote does not mean we need to specify exactly what materials will be used, but just more generally what will be improved along with the cost.

4. There is one lender we work with that will allow the homeowner to do the work themselves, but we will still need the costs to be outlined.

5. After the purchase is completed, the borrower will need to come up with the funds to complete the improvements. Funds could come from a line of credit, gifted money, store (e.g. Home Depot) credit or credit on their contractor themselves. The bottom line is that you need to figure out how to pay for the improvements, and then after the improvements are finished, the lender will release the improvement funds.

6. If you used credit cards, a contractor’s account, or gifted funds, these could be paid off once the work is complete and the purchase plus improvements funds are released by your lawyer.

7. The work typically needs to be completed within 90 days, but exceptions can be made.

The 3 Main Purchase Plus Improvement Programs in Canada, and the Unique Benefits of Each

The purchase plus improvement mortgage program is available in Canada through three main programs: CMHC, Genworth, and Canada Guaranty. Here are the unique benefits of each program:

1. CMHC Purchase Plus Rules:

- Available for small or large-scale improvements and new home construction.

- Improvement financing available for up to 95% of the ‘as improved’ value of the home.

- Improvement costs need to be less than or equal to 10% of the as improved value of the home.

- ‘As is value’ is defined by the CMHC as ‘the market value of the property after improvements’. Market value would be determined by an appraiser after the improvements are complete.

- Available for homes under $1,000,000.

2. Genworth Purchase Plus Rules:

- Must adhere to the ‘Genworth Renovation Worksheet’.

- Typically, the improvements need to be less than $40,000 or 20% of the purchase price of the home. However, in some cases, the amounts can be higher if the lender allows for it.

- Allows for a higher Total Debt Service Ratio of 44%, than CMHC maximum Total Debt Service of 42%.

3. Canada Guaranty Purchase Plus Rules:

- Lending is based on either the purchase price or the improved value of the property: whichever is less. PLUS ‘direct costs related to improvements’.

- An appraisal is needed for any improvements more than 20% of the ‘as is’ value of the property, or $40,000.

How to Get the Most Out of a Purchase Plus Improvement Mortgage

Although the purchase plus improvement mortgage can be used for many things, such as upgrading a furnace or a roof, these types of improvements may not add as much to the appraised or market value of the home. Therefore, it is important to focus on areas of improvement that not only equal the cost of the improvement but may potentially be valued higher by an appraiser than the cost of the work.

For example, upgrading your kitchen and bathrooms can increase the value of your home significantly. However, it is important to note that there is a ‘diminishing rate of return’ for improvement costs in these areas. In other words, the first $10,000 spent on a kitchen may generate an additional $5,000 in improved market value (totaling $15,000 in value from the upgrades), whereas the next $10,000 spent on the same kitchen may result in an additional $2,500 in improved value. Eventually, the dollar for dollar money spent on upgrades would be equivalent to the value realized on the upgrades.

In order to get the most out of your purchase plus improvement mortgage, it is important to:

- Spend the least amount of money

- Choose the best looking upgrade

- Choose a reasonable quality

How to Avoid Issues or Potential Loss from a Purchase Plus Improvement Mortgage

Using luxury items with a purchase plus improvements program may be nice, but the higher-end upgrades will not likely result in the most market value realized from the completed work. Therefore, it is important to install lower-cost fixtures or upgrades that look good and with reasonable quality, in order to realize optimal return.

The purchase plus improvements mortgage program is a great way to get the most out of your home purchase and upgrades. By following the seven steps outlined above, choosing the right program, focusing on the right areas of improvement, and avoiding luxury items, you can maximize the value of your investment and enjoy your dream home for years to come!

If you are considering a purchase plus improvements mortgage for your next home purchase, be sure to reach out to Boychuk Mortgage Group - Mortgage Broker. Our team of dedicated and accredited mortgage professionals can help you find the right mortgage and the very best rate possible for your unique needs and goals. 

Contact us today to learn more about our services and how we can help you make your dream home a reality!

To learn more about the services we offer, please click here. If you have questions, we'd be happy to hear from you. Please feel free to call us at (778) 808-9944 or reach out via email at riley@boychukmortgages.ca.