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What is a Purchase Plus Improvements Mortgage?

Imagine you’ve been searching for a home; you’ve visited a few houses, each time getting a clearer picture of what your dream house looks like. And then you find it: The perfect home. Only, there’s one problem: It isn’t exactly move-in ready and you don’t have the liquid cash to make the necessary renovations. That’s where a purchase plus improvements mortgage comes in.

What is a purchase plus improvements mortgage in Canada?

If you didn’t know that you can add renovation costs to your mortgage, you aren’t alone. 

According to a CMHC Mortgage Consumer Survey, 37% of mortgage consumers didn’t know about purchase plus improvement mortgage options.

A purchase plus improvements mortgage in Canada is a mortgage that covers not only the purchase price of the home, but also includes additional money to cover renovation costs. 

Essentially, your lender allows you to borrow additional cash to help you spruce up your home and make the necessary improvements to make it move-in ready. The cost of borrowing will roll into one payment, making it easy to purchase your home and renovate it once the deal closes.

How do home renovation loans work?

First, you have to find the home that you’d like to purchase. Maybe it needs a new furnace, new floors, coats of paint, a kitchen renovation, or other such improvements. Determine exactly what renovations you need (and want) and obtain an idea of what they will cost. A contractor can provide a quote to make this process as smooth as possible.  It’s recommended to get 3 quotes from different contractors to ensure you’re getting quality service and a fair price. 

Speak with your broker and explain what improvements you’d like to make to the house. Your broker will line up financing approval that will include the cost of renovations. 

You will then go through the standard home buying process. You make an offer and eventually close on the home. 

After the sale concludes and you take possession of the home, the lender will forward the agreed-upon cost of your renovations to your lawyer, who will hold that cash in trust. Your contractor can start the renovations that were agreed upon with your lender right away. The work typically must be complete within 90 or 120 days.

Once your reno is complete, the lender will send a representative to take a look at your home. Once approved, your lender will provide the money needed to pay your contractor. 

What is the best way to finance a renovation?

A purchase plus improvements mortgage isn’t the only way to fund your renovations. You can also pay cash, if you have the money, which would lower the cost of lending for your home. Not everyone is in a position to purchase a home and fund the cost of renovations, once things like down payment, land transfer fees, mortgage default insurance tax, and other closing fees are calculated. 

Some may choose to fund their renovations with a line of credit or a credit card. These options are best for people who are in a financial position to pay off their renovation costs before having to pay interest, though, since the interest rates on lines of credit and, particularly, credit cards are much higher than the cost of borrowing a purchase plus improvements mortgage.

Other ways to fund a renovation

Another option for funding renovations is to get a home equity line of credit (HELOC). A HELOC is different from a purchase plus improvements mortgage in that the homeowner obtains a loan that’s secured against the equity of their home. These loans typically have lower interest rates than lines of credit and can be a savvy way to fund renovations, particularly in strong real estate markets where an owner’s home’s value will be improved by the chosen renos.  

Much like credit cards, HELOCs allow homeowners access to a lump sum of money that can be used at their discretion. Interest rates on HELOCs are typically fixed. 

HELOCs may be similar to purchase plus improvements mortgages in that they offer access to credit at lower interest rates than other loan sources. However, unlike purchase plus improvements mortgages, you can use HELOCs to pay for more than just home renovations. 

However, for a new owner, a purchase plus improvements mortgage likely makes more sense for those wanting to renovate their home, since new owners don’t typically have as much equity built up in their home as existing owners (and, therefore, less equity to borrow against).

The bottom line

Don’t be discouraged if you’ve found the almost perfect house and it needs some improvements to make it your dream home. There are affordable options to allow you to not only renovate your home but also improve its value. 

As always, speak to your broker about the best option for you. They will help guide you through all the nuances and options to help you find the right mortgage.

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