Buying a home that needs a bit of work?

If you’re looking for a home in the Toronto area, especially if you’re looking in some of the city’s older neighbourhoods, you might find yourself coming across places that need some TLC. A little-known mortgage solution may be the solution for you:

Check out the purchase plus improvements mortgage

The purchase plus improvements mortgage gives you a way to buy and renovate so that you end up with the perfect place. Think of it as a mortgage for fixer uppers. This type of mortgage covers the purchase price of your home, plus any renovations that would increase the value. You can do it with as little down payment as 5 per cent of the final, improved property value.

Toronto homebuyers are often looking at older properties

Many people in the GTA find themselves in the same boat. You’ve found the property that you want, but you’d like to make some upgrades or repairs. You may be able to add the costs of these immediate renovations into your mortgage, instead of racking up credit card bills, department store or home renovation store cards, or cashing in investments and RRSPs. If you’re buying a home but want to finish a basement, replace old windows or wiring, or redo a kitchen or bathroom, it can make a lot of sense to add those costs to your mortgage. That way you can spread your payments over the life of the mortgage. And it can be a cost-effective way to get your dream home. You can also use your pre-payment privileges to pay the renovation off faster, once the expenses of the renovation are behind you.

The process is quite straightforward. Here are the main steps you will take:

1.  If you’re including a financing clause in your offer to purchase, see if it’s possible to make it a bit longer

This isn’t always possible in a hot market, but in an ideal world, you should try for a slightly longer financing clause, once you’ve found the home you want to buy. This gives you time to get quotes and get the lender’s approval on the improvements you intend to make to your property. If you can’t, plan B is to figure out as much as you possibly can before you even submit your offer to purchase. For example, have a contractor walk through with you during one of your viewings of the home (see # 2 below) so that they can get a head start on putting together the written estimate for you. And let the contractor know it’s a rush.

2.  Get written estimates for the upgrades

At the same time as you submit your application for approval with the lender, you also need to provide a detailed written quote (or quotes) from one or more licensed contractors, for the renovations you plan to do. These quotes should outline the scope of the work, and all costs.

3.  Get your appraisal

Unless the work you’re planning to do is $10,000 or less, you’ll need to get an appraisal done. The appraiser will provide two separate valuations: first, the value of the property “as is”, and second, the estimated value of the property once the improvements are completed. Your appraiser will want to see the quotes you’ve obtained to help with obtaining the projected future value.

4.  Renovation costs are included in your mortgage

Your lender will add the estimated costs of the renovation into your mortgage. For example, with a 5% down payment, your mortgage broker would apply for 95% of the “as improved” market value, which will be higher than the actual purchase price. The committed amount of the mortgage will be advanced to your real estate lawyer, who will be instructed to hold back the renovation funds until the work has been completed and inspected.  At closing, you’ll need to provide the full down payment amount, based on the expected improved value.

5.  Complete your upgrades, and receive the remainder of your funds

Once you’ve taken possession of your property, the work begins! Your contractor(s) will begin work on the renovations. Note that you will need to have access to enough funds to pay the contractors as agreed. Clients of mine have accessed a line of credit or a loan from parents to fund the renos, or they’ve negotiated a payment plan with the contractor. Some major home improvement retailers offer “no payment” options for up to six months.

What you can’t do is get the mortgage funds ahead of time. The lender can’t lend you more money than your property is worth! So you have to wait until the property is actually worth the “improved” amount. Once an inspection from an appraiser confirms all work is complete and a copy of the building permit (if needed) has been received, the balance of the mortgage funds will be released to you to pay for the renovations.

Here are two examples of how this works in real life:

Purchase plus improvements example # 1 (5% down):

Purchase price of home: $400,000
Improvements required: $40,000
Market value after improvements:  $440,000

Total mortgage: $418,000 (95% of $440,000)
Your down payment: $22,000 (5% of $440,000)
Amount from mortgage lender, to be released to you at closing: $378,000 ($400,000 purchase price minus your $22,000 down payment)
Amount remaining to be released to you once improvements are complete: $40,000 ($418,000 minus $378,000)

$378,000 will be advanced on your closing date. At the same time, you will be required to pay your $22,000 down payment in full. You then do the improvements. Once you get an inspection confirming that they have been completed, the remaining $40,000 will be released.

Purchase plus improvements example # 2 (25% down):

Purchase price of home:  $700,000
Improvements required:  $50,000*
Market value after improvements: $750,000

Total mortgage: $562,500 (75% of $750,000)
Your down payment: $187,500 (25% of $750,000)
Amount from mortgage lender, to be released to you at closing: $512,500 ($700,000 purchase price minus your $187,500 down payment)
Amount remaining to be released to you once improvements are complete: $50,000 ($562,500 minus $512,500)

*Note: some lenders cap the improvements at a maximum of $40,000 or 10% of the “once improved” value. If you need more than this, your mortgage broker can shop around for you.

Other things to know:

• Some lenders will also allow you to get a portion of funds advanced to you at certain stages of completion, rather than requiring you to wait until full completion, although this is more typical with a full-blown construction mortgage.
• Some mortgage lenders require that the work be completed in a certain period of time (usually 90-120 days) after your closing date, while others are more flexible. It’s important to keep the lines of communication open between you, your mortgage broker, and your contractor(s), so that these deadlines are top of mind for everyone.

Depending on your goals and needs, we can find you a mortgage lender and product that will help you achieve your goals.

If you think a purchase plus improvements mortgage Canada might be a good option for getting you the perfect home, feel free to get in touch with me. I’d be happy to dig down into the details that are relevant to your specific situation.

Happy house-hunting!

Photo credit: [c] Decha Huayyai for vecteezy.com