Purchase plus improvements introduction
Purchasing a previously owned home, that hasn’t been recently renovated, can mean that the new owners want to put some work into freshening things up. Home renovations have been very popular this year as Canadians moved to larger homes and set themselves up for move favourable work from home situations.
Many of our client’s who utilize our partners at Spire Mortgage's use what’s called a, “purchase plus improvements” mortgage to help make sure that they were borrowing the cost of the renovations at the very best rate. Purchase plus improvements mortgages can be a super useful took for clients but they come with a little bit of fine print as well. Let’s take a quick look at the pro’s and cons.
Pros of a Purchase Plus Improvements Mortgage
You can fund your renovation at the cheapest rate. A purchase plus improvements mortgage allows you to tie your renovation costs into the mortgage. If you had to fund these costs on your credit cards, you could be paying 18% in interest until you paid them off. Including these costs in your mortgage allows you to pay closer to 2% in interest.
You can complete the renovations right away. Many clients decide to save for a few years before completing their renovations. Tying the renos into your mortgage at closing allows you to make the home “yours” and put your personal touches on it right from the start.
Cons of a Purchase Plus Improvements Mortgage
The work has to be completed in 90 days. Completing a renovation in 90 days can be OK for some but can feel like a rush for others. Many clients feel this timeline is too tight to complete their desired project.
Not everything can be included in the purchase plus improvements transaction. Items that are outside the home, (like landscaping), or can be removed from the home, (like appliances) cannot be included in the purchase plus improvements mortgage.
Your cost is typically capped at $40,000. Although we’ve seen exceptions up to $90,000, typically the total cost of the improvements cannot exceed $40,000.
How does a purchase plus improvements mortgage actually work
While you are shopping for homes with your Realtor, keep your eyes peeled for items that you may want to or need to improve in the homes that you’re looking at. Once you decide you’ve found the property for you, take a third-party contractor with you to the property and explain the work that you would like to complete. Once the sellers accept your offer, you’re ready to go. Send your mortgage broker both the signed offer to purchase and the comprehensive quote from your contract and they will get to work on your purchase plus improvements transaction. Here is an example:
Purchase price of your new home: $350,000
Price of improvements: $30,000
Total purchase price of home will be: $380,000
Total down payment required will be 5% of $380,000 (this is a key point)!
On your possession date, your lawyer will advance $350,000 to the sellers. Now, you’ve got 90 days (from that possession date) to complete your work. Once complete, your mortgage broker will send an inspector to the home and confirm the work has been done. Once confirmed, your lawyer will release the “purchase plus” funds of $30,000 to either you or your contractor.
Can I use a purchase plus improvements mortgage if I’m doing the work myself?
If you’re completing the work yourself, the lender will only cover the cost of the materials. Make sure that as you purchase the materials you save all of the paid receipts. You will have to show proof of payment before the lender will advance the funds.
Purchase Plus Improvement Mortgage Tips
If you’re considering a major renovation like a garage or a roof it’s important that the contractors are very clear on your timeline. Although lenders are typically flexible about granting exceptions on the purchase plus improvements timelines up to 120 days, it’s important to know that it’s an exception and not a rule. If your renovation goes beyond 90 days, the lender could pull the funds back and place them as a lump sum payment on your mortgage.
Remember that purchase plus improvements mortgages don’t fund in stages. The work cannot be partially complete, it has to be fully complete in order for the lawyer to release the funds. Make sure that you’ve budgeted accordingly to get yourself from start to finish, especially if you’re completing the work yourself.
If you’re considering a major renovation, over $60,000, it is important to let your mortgage broker know up front. There are specialised programs for this type of loan that can provide multiple payments for the renovation funds.
In summary, purchase plus improvements mortgages are a great tool to help you make the necessary changes to the house on the front end, but they should be navigated in partnership with your experienced team of Real Estate professionals.
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