The following post is by Jason Friesen, a mortgage broker with Premiere Mortgage Centre in Toronto, Ontario.
There is a little known program that you might be able to take advantage of, which could increase your chances of finding a home – especially in a market where bidding wars are the norm and you may not have the money to buy a “fixer upper”. With it, you may be able to purchase a home that otherwise may have been overlooked, due to the fact that it was in need of a little TLC. Whether it’s a new kitchen, bathroom, windows, flooring, etc. this program gives you the flexibility to purchase a home and include the cost of renovations in your purchase.
The CMHC Improvements program gives qualified buyers the ability to borrow up to 10 per cent of the as-improved value of a home to put towards the cost of renovations and include it in their mortgage loan amount. Formerly known as the Purchase Plus Improvements program, this flexible financing option is offered by the Canada Mortgage and Housing Corporation (CMHC) – the government insurer of mortgage loans taken out with less than a 20 per cent down payment.
To give you an example of how it works, let’s say the purchase price of a home is $500,000. If the renovation you want to complete would result in the value of the home going up by $50,000, for an as-improved value of $550,000, you could borrow 10% of that ($55,000) for your renovation. This is an ideal option for first-time homebuyers who typically have smaller down payments and can’t afford to both put money down and pay for any renovations they want to do as soon as they take possession.
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But how does it work? Borrowers must provide a quote from a contractor, before closing on the house, which is then submitted to both the mortgage lender and CMHC for approval. In order to do this, you must add a condition in your Agreement to Purchase that says you want a contractor to inspect the home before closing. The contractor will provide a quote that breaks down the scope of work and the costs associated with it. Once both CMHC and the lender approve the improvement amount, it is added to the mortgage loan.
On closing day, the improvement amount is advanced to your lawyer, who will hold onto it until the renovations are complete – this means that you don’t actually get the money until the work is done, so we recommend that our clients have access to an unsecured line of credit so that the initial deposits/costs can be paid and work can begin. When the renovation is complete, the lender sends an appraiser to your home, to confirm that the scope of the work outlined on your quote is done. Once confirmed, the lender will authorize your lawyer to release the improvement amount to you.
So, what’s the catch? Borrowers cannot include the costs of appliances in their quote, as they are not part of the physical structure and could be taken out if you ever decided to sell. From our experience, CMHC and lenders usually will not approve renovations to do things like add another unit to the property (like a basement apartment) or fix something like a furnace that should be in good working order when you buy the home. So keep that in mind when you are considering your renovation project(s).
With a lot of first-time buyers trying to find creative ways to get into this increasingly expensive market, the CMHC Improvements program gives you the ability to look at homes that need a little TLC. We’ve had several clients manage to build up several thousands of dollars in equity, by using this program instead of buying a home that has already been renovated. Why pay more for a house that someone else has renovated into their dream home, when you can include the renovation costs in your mortgage loan and renovate to make it yours?