It can be frustrating finding and financing a property that you want to live in. You might find your dream home, only to find out that it is in need of some major renovations. The costs of renovations can really add up, and you might not be able to afford them. Luckily, there is a solution that will allow you to purchase a property while also covering the costs of renovations—a purchase plus improvements mortgage.
Key Points
- A purchase plus improvements mortgage lets you borrow the cost of renovations and add it to the price of the home.
- You can roll the cost of the renovations into your mortgage, leaving you with one loan payment that includes the mortgage and funds borrowed to pay for the upgrades.
- You should start renovations as soon as you take possession of the home, as you’ll have a limited amount of time to finish the work.
- You won’t receive the funds from the purchase plus improvements mortgage until the work is complete.
What Is A Purchase Plus Improvements (PPI) Mortgage?
A purchase plus improvements mortgage allows you to lump in the cost of renovations with the purchase price of a home. In other words, you can borrow money to cover the cost of renovations and roll it all into your mortgage.
This type of financing is available for existing properties and for new construction properties. One of the main benefits of a purchase plus improvement mortgage is that you can buy a house that is more affordable and then add value almost immediately by making specific renovations. Plus, this type of financing gives you access to extra funds needed to upgrade your home as required without having to apply for additional financing.
The amount your lender offers is based on either the value of the improved property or the purchase price plus renovation costs, whichever is lesser. If the cost of the renovation project exceeds 20% of the purchase price of the home, your lender may choose to provide with the funds via installments rather than in one lump sum as different phases of the project are completed.
There is also a limit on the purchase price of improvements. Certain lenders and CMHC requires it be below $40,000 for improvements or 20% of the value of the home, whichever is less.
Canada’s Three Main Purchase Plus Improvements Mortgage Programs
In Canada, there are three main providers of purchase plus improvements programs:
- CMHC Improvement
- Canada Guaranty Purchase Advantage Plus
- Sagen Purchase Plus Improvements Program
Typically, as the home buyer, you won’t have any interaction with these providers unless your down payment is less than 20%.
CMHC Improvement
CMHC Improvement is an option for consumers who are purchasing an existing home or who are looking to build a new house. This program provides insured financing for up to 95% of an owner-occupied home’s “as-improved” value.
Canada Guaranty Purchase Advantage Plus
Purchase Advantage Plus from Canada Guaranty is designed to help Canadian consumers purchase a home and add value through renovations. This program provides up to 95% financing for 1 to 2-unit properties valued at no more than $1 million.
Sagen Purchase Plus Improvements Program
The Sagen Purchase Plus Improvements Program is another option for homebuyers who wish to buy a home while adding value immediately through improvements. Funding may be provided in one lump sum or multiple advances.
How Does A Purchase Plus Improvements Mortgage Work?
A purchase plus improvements mortgage is like a conventional mortgage whereby you’re given a lump sum of money to cover the cost of a home purchase. But with a PPI, you’re also given a little extra money to cover the cost of renovations.
The improvements must be permanent and add value to the home, such as a new roof, new flooring, or a new furnace. As such, non-permanent fixtures like new appliances don’t qualify for a purchase plus improvements mortgage.
How To Apply For A Purchase Plus Improvements Mortgage?
The process of applying for a Purchase Plus Improvements mortgage varies by lender, but generally, here’s what you can expect:
Step 1: Assess Renovation Needs And Costs
Once you’ve found the house you want to purchase, you’ll need to determine the exact renovations you want to complete. This typically must include quotes from a contractor. Knowing how much you’ll need to spend on updates will tell you how much extra funding you’ll need to apply for.
Step 2: Apply For A Mortgage Approval Based On The Property’s Current Condition
Obtain a mortgage that includes the cost of the renovations you want to complete. You’ll need to speak with a mortgage specialist about your purchase plus improvements mortgage options. You’ll also need to provide the renovation quote from your contractor.
Step 3: Close On The House
Go through the typical home buying process, including signing all documents with your real estate agent and lawyer and paying closing costs. Then, you’ll get the keys to your new home.
Step 4: Start Renovations
Once you take possession of the home, you can get your contractor to start work right away. The renovations must be completed within 90 days (or 120 days depending on the lender). Your lender will typically send your lawyer the money needed for the renovations, which will be held in trust until the work is complete.
Step 5: Home Evaluation
Once the renovations are done, your lender will send someone to assess the work and approve it. Then, your lender will send the money to pay your contractor for their work.
What Are The Requirements For A Purchase Plus Improvements Mortgage?
To get a purchase plus improvements mortgage, you’ll need to ensure the property you’re buying is eligible. Similarly, depending on the property size, you’ll need to ensure it meets the minimum equity requirements.
Types Of Properties Eligible For A Purchase Plus Improvements Mortgage
The following types of properties qualify for a purchase plus improvements mortgage:
- Properties with 1 to 4 units, with one unit being occupied as the principal residence
- Both new and old properties
Minimum Equity Requirements
You must have a certain amount of equity in the property to qualify for this type of financing, as follows:
| 1 – 2 units | 5% on the first $500,000 of the home value 10% on the rest on the home value |
| 3 – 4 units | 10% |
| Rental Properties | 20% |
Factors To Consider When Applying For A Purchase Plus Improvements Mortgage
There are some things to keep in mind when applying for a purchase plus improvements mortgage:
Renovation Time Limits
Different lenders offer you different time limits to finish your renovation. So, be sure to pick a lender that will give you a time frame that works for you. Lenders offer up to 90 and 365 days to finish renovations.
Get A Price Quote From A Contractor
You need to get a price quote from a contractor so your lender knows how much money is needed to cover the cost of the renovations.
Extra Money To Your Mortgage Can’t Be Added After Closing
Your renovation quotes must be submitted when applying for your mortgage. The extra money you get from your lender can’t exceed the amount provided in your contractor quotes. So, for instance, you wouldn’t be able to go back and apply for additional funds a couple of months after your mortgage closes.
DIY Renovation
Some lenders require a third-party contractor to do your renovations and may not allow you to do any renovations yourself.
Renovation Must Increase Property Value
Your mortgage appraiser generally requires that your renovation will increase your property’s value. If it doesn’t, you might be responsible for paying at least some of the renovation costs out of your own pocket.
Pros And Cons Of A Purchase Plus Improvements Mortgage
There are advantages and disadvantages to the purchase plus improvements mortgage program that you should consider before applying:
Pros
- Finance the cost of renovations. With a purchase plus improvements mortgage, you’ll have financial assistance to pay for renovations and start improving the home right away, rather than waiting to save up until you have enough money to cover the cost.
- Include the cost of renovations in the mortgage. With this financing option, you can roll the cost of renovations into your mortgage. That way, you can finance both the purchase price of the home and the upgrades in one loan. This will help cut back on out-of-pocket expenses and make it easier to manage your finances.
- Increase the value of your home. With the funds needed to renovate your home, you can get started improving the property and adding instant value and equity to it. This may be helpful if you decide to sell in the future, refinance, or tap into your home equity.
Cons
- No upfront funds provided. Perhaps the biggest drawback to a purchase plus improvements mortgage is that you won’t get the funds to cover the renovation costs until after the work is done and appraised by your lender’s representative. That means you’ll have to cover the renovation costs upfront before the funds are released.
- Additional steps involved. The purchase plus improvements mortgage process is a little more involved than a standard mortgage because of the additional paperwork and inspections required. This can complicate things for you when you’re trying to buy a home.
- Higher mortgage payments. Since you’re borrowing more money than what you’d otherwise need to pay for the home itself, your mortgage payments will be higher.
Alternative Ways To Finance A Home Renovation
There are some options other than a purchase plus improvements mortgage when it comes to financing a home renovation.
- Cash – You could pay for your renovation in cash if you have the cash on hand to do so. Whether you can cover the whole amount or partially, this would help lower the cost of borrowing.
- Credit Card – You could also pay for your renovations with a credit card. However, you should only consider this option if you can pay off the amount within the same credit billing cycle.
- Line of Credit – A line of credit is another option. It provides instant access to the funds and you only pay interest on what you use. Moreover, like a credit card, you can simply pay the minimum payment until you’re ready to pay off your balance. Be sure to keep an eye on the interest rates though, since interest rates for this financing option will usually cost you more than a purchase plus improvements mortgage would.
What About A HELOC?
You can also fund renovations through a home equity line of credit (HELOC). This kind of line of credit is secured against the equity you’ve built, so this means you already need to own a house. A HELOC is particularly good for renovations because it’s a type of revolving credit, similar to a credit card.
You’ll have access to a set amount of money and can use however much is needed for your renovations and will only be charged interest on the amount you use. The upside of a HELOC is that they usually have lower interest rates than other financing options like credit cards or personal lines of credit, and these interest rates are often fixed.
Learn more: How To Finance Home Renovations
Bottom Line
A purchase plus improvements mortgage is a great way to afford a home and renovations without having to look for other ways to fund upgrades. With this program, the cost of renovations is included in the mortgage, which means you only have your mortgage to worry about rather than other loans to cover the renovations. While there are some requirements and restrictions, a purchase plus improvements mortgage is fairly flexible and lets you cover the cost of renovations.
