Buying & Selling

Purchasing or refinancing a home that needs renovations

Canadian lending institutions have come to recognize that the majority of homes that are being purchased throughout the country require varying degrees of repairs and renovations.

These range from cosmetic fix-ups and repairs to the creation of additional living space, such as basement apartments, additions, extensions and the remodeling of bathrooms and kitchens.

Even with current interest rates at their lowest levels in years, it is often difficult for new homebuyers to qualify for further renovation loans once they have taken possession of the home with a new mortgage. 
   

Basic Concept:

Approved clients can now purchase or refinance a home and add the cost of repairs and/or renovations into one mortgage. The future market value of the home with the added renovations is calculated to determine allowable costs. The benefits are as follows:

• The borrowing costs of the proposed renovations are at their lowest possible rate, as they are included in the mortgage
  
• The client will not have to apply for secondary financing for the renovations after move-in (which, as mentioned, is often hard to obtain for most first-time homebuyers).
  

Example 1:
You purchase a home for $200,000.00. Through Canada Mortgage and Housing Corporation (CMHC), Genworth Financial (Genworth) or another mortgage default insurance company, you have been approved for a mortgage with 5% down, or $10,000. Your mortgage loan will be $190,000.

The home has an unfinished basement, and you want to install a basement apartment upon possession.  The cost of the basement apartment is  $25,000.00.

Upon approval, CMHC will allow you to borrow a total of $213,750 which is 95% of the total sum of the home purchase of $200,000 plus the renovation cost of $25,000. Your down payment will be readjusted from $10,000 to $11,250, which is a cash outlay increase of only $1,250. The renovations must be performed immediately upon closing. 


Example 2:
You purchase a home for $300,000. While the existing kitchen may be fully functional, the style may be old and you want to change to a more modern look. As well, you may want to change the flooring in the dining room to hardwood or ceramic tile. The total cost of the proposed renovations will be approximately $30,000.

Upon CMHC approval, your mortgage will be 95% of the future value of the home with the renovations completed ($330,000). Instead of a down payment of  $15,000 on the purchase price of $300,000 (your down payment will now increase to $16,500 (5% of the $330,000).

All of this can be done by putting down as little as 5% of the "as improved" value. For example, if you purchase a home for $120,000 and want to do $30,000 worth of renovations, Genworth/CMHC will insure a mortgage based on 95% of the "as improved" value. In other words, with a down payment of $7,500 (5%) Genworth/CMHC will insure a mortgage of $142,500. The key to making this work is including the cost of the renovations in the "as improved" value of the house.  In this example, Genworth/CMHC would have to agree that the house would have a value of at least $150,000 after the $30,000 worth of proposed renovations was done. The insured loan would be based on the lower of the purchase price plus the actual cost of improvements or the "as Improved" market value.

How It Works
When you decide to make an offer on a house, you make the offer conditional for a longer period of time because you will have to arrange for a qualified contractor to put together a description and a cost estimate for the proposed repairs or renovations. Then you forward the contractor's estimate along with the Agreement of Purchase and Sale for submission to the lender for Genworth/CMHC’s approval.

The following information needs to be prepared by the contractor and submitted along with your application to the lender:

Renovations (e.g., kitchen renovation/ bathroom renovation):

1. Description of the work
2. Types of materials being installed with applicable quantities (e.g., 250 sq. ft. ceramic flooring)
3. TOTAL COST of all work, including applicable taxes

Additions (e.g., rear family room addition, second storey addition):

1. Description of work
2. Copy of drawing
3. Cost breakdown of all proposed work in a similar format to the following as applicable:

• Excavation and foundations--exterior finish
• Framing--interior wall and ceiling finish
• Windows and exterior doors--finish carpentry (e.g., trim, doors, and kitchen cabinets)
• Electrical
• Interior painting
• Plumbing
• Flooring 
• Heating
• Site work (e.g., landscaping)
  
  

Purchase Plus Improvements Programme

The following are some important reminders for borrowers considering the Purchase Plus Improvements programme:

1. Make an offer on a house for a conditional period that is longer than the usual 10 business days.
2. Get estimates for the cost of improvements immediately after the offer is accepted.
3. Submit a full application when all estimates have been received.
4. Prepare, as the borrower, to pay for a final inspection when all work has been completed.
5. Remember that once the inspection has been done and confirmation of completion has been sent to the lender,  funds will then be released to your solicitor who then pays the contractor directly.

This is an excellent opportunity to acquire and appreciate the home you want at the best rate
available. Especially when you consider the slightly higher downpayment against the potential
growth of your investment.

For more information, you can call CMHC at (416) 221-2642 or visit their web site at www.cmhc.ca

The Purchase Plus Improvements mortgage is likely CMHC's best-kept secret. According to CMHC, there is no limit on how much money you can borrow under this program. The concept is simple. You decide to buy a house but the home needs work (new kitchen or furnace, for example). You are required to provide the lender with a quotation for the improvements. The amount of the quotation will be added to the amount of the mortgage. The improvement funds will be sent to your lawyer "in trust" on closing and will not be released until the work is completed and inspected. Your bank may limit the Purchase Plus Improvement amount to 10% of the purchase price.


Refinance Plus Improvements Programme

The concept behind a Refinance Plus Improvements mortgage is exactly the same as a Purchase Plus Improvements mortgage with one difference:

The Refinance Plus Improvement mortgage offers first mortgage refinancing up to 90% of the projected improved value, as opposed to 95% of the improved value for the Purchase Plus Improvement mortgage.