Purchase Plus Improvements
It has often been said that we live in homes that we don’t really like, to fix them up three months before we sell them for the next person to like…
If this is true of your home buying past, you may be able to fix that problem with the Purchase + Improvements Mortgage Program.
The Purchase + Improvements Program may be a great solution if you purchase a home with the right floorplan in a great neighbourhood, but the house needs a little cosmetic care before you really start to love it. Many of us find the right home, but we end up not buying it because it is dated or the house has seen a lot of living, but we don’t have the money to make it home. The Purchase + Improvements program allows you to add the costs of the improvements to your mortgage, and it is great for fixing up the kitchen, bathrooms, hardwood floors, painting, etc., immediately after you have purchased the home.
- Applicable to insured mortgages for purchase transactions for homes with values under $1,000,000. [A mortgage is insured whether the borrower pays for the mortgage insurance or the lender pays for the insurance on behalf of the borrower]
- Not all lenders offer the program, and the program varies between lenders and mortgage insurers.
- The “as improved value” of the property must be less than $1,000,000.
- The lending value is based on the lesser of the improved property value or the sum of the purchase price plus direct costs associated with the improvements
- Minimum down payment is based on the lender’s as improved value [purchase price/appraised value + improvements]
- Borrowers must qualify for the final mortgage amount. [mortgage + improvements]
- The improvements must not exceed 20% of the property’s initial value or $40,000, whichever comes first.
Estimates/Quotes for the improvements are required upfront when the mortgage application is submitted to the lender for approval. The estimates/quotes must be from a licensed contractor and must be approved by the mortgage lender.
- Improvements must add value to the underlying security to qualify for the purchase + improvements program.
- No funds are advanced upfront, and no progress advances are permissible.
- Improvements must be 100% completed within 90/120 days of the closing date.
- Upon completion of all the improvements, an inspection report (ordered by the mortgage brokerage at the borrower’s cost) from a licensed appraiser is required to determine that the improvements are 100% complete and 100% completed according to the approved quotes.
- Improvements deemed to be construction, such as structural changes, additions to the property, etc., are ineligible for the improvements program.
- Refinances, rental properties, mid-term improvements, homes with values over $1,000,000, 30-year amortization mortgages, etc., are ineligible for the program.
- Personal chattels such as furniture, appliances, electronics, or other moveable property are ineligible for the program.
There are some significant benefits to the program:
- Add value to your home. The improvements add value to your home.
- Purchase a home with a minimum down payment and make improvements. The program allows you to purchase a home with the minimum down payment and purchase a home that you possibly could or would not have purchased if it wasn’t for the Purchase + Improvements program that provided you with the funds to do the necessary renovations.
- It can add to your happiness. You get to live in a home that you like right from the beginning instead of living in a home you don’t like, to fix it up for the next person before selling it.
- You are borrowing after-tax money, which saves you money. Let me explain: if you did not want to add the cost of the improvements to your mortgage, you would have to earn the money and pay taxes on it. E.g. If your improvements cost $40k and you are in a 35% tax bracket, you would need to earn approximately $54,000 to have the after-tax amount of $40,000 for your improvements.
- Avoid consumer debt. If your home needs renovations and you choose not to add it to your mortgage, but you also don’t have the savings, you could be tempted to get into higher credit card or other consumer debt.
As good as the program is, it does have some cons associated with it:
- The improvements must be completed within the lender’s timeframe. If you have the savings to carry out the improvements without using the program, it is easier to carry out the renovations in your own time.
- You must carry out the improvements immediately after you have purchased the home. The program is not applicable for improvements during the term or at mortgage renewal time.
- The improvements are limited to the approved quotes only. The program covers only the improvements approved by the lender. Note: If the Purchase + Improvements program is used as an “add-on” to other renovations carried out at the property but not covered by the program and the property is in disrepair at the time the appraiser completes his/her final inspection of the completed improvements work- the appraiser is obligated to report this in his/her report which could prompt further inspections by the lender and ultimately cause the lender to cancel the mortgage if the lender deems that the other renovations are affecting its lending security.
- No funds are advanced to you upfront. The lender does not advance any funds to you on the closing date, and neither are progress advances possible- this means you will need to self-fund your improvements project until the upgrades are completed, and the lender advances the funds to you through your solicitor.
- Chattels are not covered by the program.
The program, unfortunately, does not allow you to replace any personal or movable items such as appliances.
- You are adding debt. If the improvements are not paid from savings, it is fundamentally adding debt and interest to the borrower. Mortgage interest rates are usually substantially lower than credit card or unsecured debt interest rates, but improvements are nevertheless debt.
Final Notes About the Purchase + Improvements Program:
The program has significant benefits; I have personally used it in one of my earlier home purchases. It allowed us to purchase a “runt” home in a great neighbourhood, and after we fixed it up with the use of the improvement funds, we loved it and later on sold it at a significant profit. However, as I explained above, the program is not for everyone.
I am debt-averse, so here is what I would do if I purchased a home that needed improvements:
- If you are selling and buying a home and you have sufficient proceeds from the sale of your home. Hold back some of the equity and carry out the renovations using that cash
- If you don’t have the savings for the improvements, start a savings plan and use these savings to carry out the improvements over time.
Reach out to us to have a conversation about the Purchase + Improvements Program or your other renovation needs.
- Subject to change at any time and without prior notification or warning
- Subject to lender approval and lender terms & conditions
- For information purposes only
- Based on estimates
- The article is based on generic information and is not based on any specific lender and/or mortgage insurer’s programs.
- This information cannot be used for decision-making purposes.