in Mortgage Financing by David Iverson

How do I include the cost of renovations in my mortgage?
Whether it’s your first home, upgrading to a larger home or downsizing, it is possible to incorporate necessary renovations in a mortgage. This particular strategy is known as a “Purchase Plus Improvements”. You may or may not be planning on renovating a new home but it’s good to know this option does exist if necessary.

When you are shopping with your Realtor you want to find a property and neighbourhood that best suits your needs. Once you have found a home and the bargaining process has begun contact a licensed contractor or other qualified professional to get quotes on the work you want done. Provide those quotes to your Mortgage Broker to confirm the project and cost is acceptable to the Lender.

What do I need to know about the “Purchase Plus Improvements Mortgage”?

On the closing date (sale finalized) mortgage proceeds are advanced to the vendors and you are now able to move in and begin the planned renovations. The cost of the upgrades approved by the Lender will be held in trust by the lawyer and won’t be released until the work has been completed. At this point an appraiser will inspect the home with special attention to the renovations and report back to the Lender. When the Lender is satisfied with the report the remaining funds will be released. With this in mind, you will want to have enough cash on hand or available credit to pay costs and other expenses along the way to through to completion.

The cost of acceptable “improvements” will vary depending on the Lender however the standard is the lesser of $40,000 or 10%-20% of the completed value of the home.

When budgeting for your down payment on the purchase you must base your calculation on the improved value of the home, not the price agreed to on the accepted offer. Example: Purchase price is $400K and your quote for renovations is $40K, therefore the improved value will be $440,000. Minimum down payment required: $440,000 X 5% = $22,000.

You will want to confirm early what improvements are acceptable to the Lender and what is not. Usual upgrades could include a new roof, new flooring, replace furnace or windows, kitchens & bathrooms. Always get approval first before you go ahead with the work.

Complete the upgrades as requested and don’t make any changes to the plan without confirming it is acceptable to the Lender. Your property is the Lender’s security and they may not agree the improvements you made maintain the original agreed to value.

There is a predetermined amount of time you have to complete the renovations and this will vary with different Lenders. You could have as little as 60 days up to a maximum of 120 days depending on the size of the project. Sometimes there can be exceptions to certain restrictions such as weather delays for outdoor work.

Purchase plus improvements has been used for brand new homes to complete landscaping, build a deck or put up a fence.

If you are looking at completing a major renovation on your current home you might want to consider a similar idea by way of refinance. An appraiser will determine the value before the project begins and what it will be with the completed upgrades. A new mortgage is written based on the improvements and the existing mortgage is paid out with the balance of funds held in trust with the lawyer. When the project is confirmed finished by the appraiser the balance of the funds will be released. The rules are similar to the Purchase Plus Program and the great part is that you can choose the timing based on the attractiveness of the interest rates.

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