Wouldn’t it be amazing if you found a property that checked all the boxes? That would truly be a miracle.
But, when it comes to buying a home in Canada, finding "that house” that checks all the boxes can be challenging. We have to make a few compromises and say things like, “we’ll renovate the kitchen eventually, just once we’re settled in.”
What if you didn’t have to make that compromise? What if you could have that renovation completed within the first few months of moving in and include the costs in your mortgage?
Introducing the Purchase Plus Improvement Plan! This innovative mortgage product allows homebuyers to not only purchase a home that’s nearly perfect, but also make renovations or improvements to the property, all rolled into one mortgage.
What is a Purchase Plus Improvement Plan?
A Purchase Plus Improvement Plan, also known as a Renovation Mortgage, is a financing option available to Canadian homebuyers that allows them to purchase a property and include the costs of renovations or improvements in the same mortgage.
This way, you take advantage of a lower interest rate and one monthly payment, making it the cheapest way to complete renovations.
While it’s cost-effective, it’s complicated to get a PPI and an experienced mortgage broker should navigate you through this process.
The Process Simplified
After an offer to purchase is made, you will have to acquire at least three quotes from contractors to determine the cost of the renovations. Most renovation projects cost about 10 percent of the home’s purchase price. If the home is $400,000, a kitchen renovation may cost approximately $40,000 as an example.
The lender will also have to appraise the property in its current condition to determine the total loan amount. There are only a few mortgage lenders who offer this type of mortgage product in Canada. The mortgage must also be insured by the Canada Mortgage and Housing Corporation (CMHC). Sagen, or Canada Guaranty.
The appraiser will assess the value of the house before improvements (as-is) and what the value would be after improvements (as-improved). The PPI program can loan up to 95 percent of the lesser of the following amounts:
the as-improved value, or
the as-is value plus the cost of improvements
The funds for the renovations are then held in trust by your lawyer until the work is completed. It's important to note that the lawyer and lender may require proof of completion of the renovations before releasing the funds. For larger projects over $40,000 or 20 percent of the purchase price, you can receive payment instalments to cover project costs.
Typically, renovations must be completed within 90 days after move-in. It’s a fast way to turn your new purchase into your dream home, but it does carry upfront costs.
This financing option can be a great way to make necessary upgrades or cosmetic changes to a home without having to pay for them out of pocket. It can also be beneficial for those who want to customize a new property to their tastes or improve its value before selling it.
How To Take Advantage of a Purchase Plus Improvement Plan
Here are the main ways you can take advantage of the Purchase Plus Improvement Plan:
Purchase a property that is priced below market value due to its condition and use the renovation funds to make necessary upgrades,
Customize a new property to your liking using the renovation funds,
Pros and Cons of Purchase Plus Improvement Plans
The Purchase Plus Improvement Plan has several potential advantages and disadvantages to consider.
One of the primary benefits is that it allows homebuyers to include the cost of renovations in their mortgage, which can help save money on out-of-pocket expenses. It also provides a single, manageable monthly payment, which can be more convenient than dealing with multiple payments for the property and renovation costs.
Additionally, by making improvements to the property, you may increase its value, which can be beneficial for those looking to sell or refinance in the future.
However, there are also potential drawbacks to consider. The main one is that you will have to pay for the renovation costs upfront before the funds are released by the lender. And if the renovations take longer than anticipated or cost more than estimated, you could end up with additional expenses or delays in receiving the funds from the lender.
Another potential downside is that getting a PPI adds an extra layer of complexity to the mortgage process and may require additional paperwork and inspections. With how fast the market has been moving in the last few years, it can be tricky to get all your renovation quotes done in time.
Your project budget will also include costs for lawyers, home appraisals, and timeline inspections which may not be covered through the PPI.
And finally, the other downside is that you would be increasing your total mortgage amount to include the renovation costs. This can result in higher monthly payments and interest charges over the life of the loan. However, this cost is not nearly as high as other options, such as a Line of Credit or other loan option.
No Improvements: $400,000
5% Downpayment: $20,000
Mortgage Insurance Premium (less than 20% downpayment): $15,200
Total Mortgage Cost: $395,200
Monthly Payment: $2,355.07
With Improvements Purchase Price: $400,000
Proposed Improvements: $40,000
As-Improved Value: $440,000
5% Downpayment: $22,000
Mortgage Insurance Premium (less than 20% downpayment): $16,720
Total Mortgage Cost: $434,720
Monthly Payment: $2,590.57
Benchmark Rate – 5.25%
25-Year Amortization
Monthly Payment Difference: $235.5
Bringing it Down to the Studs
The Purchase Plus Improvement Plan can be a useful financing option for those looking to purchase a property that needs work or make improvements to an existing property (there are now options for Refinance Plus Improvement plans!)
It allows homebuyers to include the cost of renovations in their mortgage, which can save money on out-of-pocket expenses and provide a manageable monthly payment.
However, it's important to consider the potential drawbacks, such as increased debt and higher interest rates, before choosing this option. Make sure to do your research and speak with your mortgage specialist to determine whether this financing option is right for you.