By rolling the costs of renovation into a purchase-plus-improvements mortgage, you can make a good house GREAT
By Steve Harrison
Looking at buying a home that could use an update? A purchase-plus-improvements mortgage might be exactly what you need.
These amazing customized mortgages allow you to make home improvements as soon as you move into your new house, rolling into your mortgage the costs of value-enhancing changes. That means you could replace the floors, update a bathroom, or replace old electrical such as knob and tube — whatever improvements an almost-perfect property needs to make it even more beautiful right now.
We recommend purchase-plus-improvements mortgages to our clients because, while there are limits on what you can do, these loans are the most affordable way to finance a renovation — and you get to live in your upgraded home right away.
One of our clients, Brian, bought a place in Oakville and decided to utilize the Purchase Plus Improvements Mortgage.
“The best part of financing through this option was the ease of use and the ability to do a major renovation by adding a small amount to each mortgage payment,” Brian wrote in an email recently.
A purchase-plus-improvements mortgage means that home buyers are free to fall in love with a home that has almost everything going for it. An extremely dated bathroom or a roof that needs replacing doesn’t have to be a dealbreaker.
“We decided to buy a home we knew we would need to do a significant amount of work on because of the option to do mortgage plus,” said Brian.
They redid their kitchen with new cabinets, flooring, lighting, plumbing, and electrical, as well as their basement, with new flooring and a four-piece bathroom, plus new bay windows and smart home upgrades. Pretty sweet.
This approach makes perfect sense because of today’s historically low mortgage rates. A mortgage is the cheapest way to borrow. An additional $40,000 on your mortgage will cost you far less than borrowing $40,000 on a line of credit — a common financing option you might consider if you decide to put the renovation off until later.
The 90- to 180-day timeline on these mortgages means you and your contractor must be prepared to finish renovations promptly. But the timeline is partly what makes it so awesome: You improve the value of your home and you get to live in it right away.
The exact timeline will depend on your lender, and a mortgage broker can help you navigate the options.
Brian notes that planning and communicating was important in the process. “It was important to let the contractors know the timelines, so everyone is aware of expectations,” he said.
The maximum amount you can borrow for improvements can vary, but for most home buyers, $40,000 is the base amount. In some cases, a knowledgeable mortgage broker may be able to help you get approval for more.
Here’s how it works
First, you’ll work with a broker to be pre-approved for your maximum amount.
After you find a home and your purchase offer is accepted and the mortgage is approved, you’ll get estimates for improvements you want to make. Your broker can pass the estimates to your lender for approval.
If your lender agrees that your planned renovations will indeed improve the value of your home, they’ll send your broker an approval for the revised amount of your mortgage — the purchase price, plus the costs of renovations.
On your closing date, the amount approved for your renovation will go to your lawyer, to be held until you’ve completed the proposed renovations. You’ll receive the funds when your renovation is complete.
That means you must pay up-front costs of your renovation from your pocket. Some of our clients have used a credit card or a line of credit to get through the period of renovation.
After an appraisal confirms that your renovations were completed within the agreed upon amount of time, your lawyer can release the funds to you.
It’s important to note that your minimum down payment will be calculated based on the total amount of your home’s assessed value — the purchase price plus the price of the approved renovations.
Types of improvements that are likely to be approved by lenders:
- Windows and doors
- Energy efficiency
- Living room
Purchase-plus-improvements mortgages are the most affordable way to finance home improvements. That’s why we love them, and why you should, too!