November 5, 2020 • Buying
What is A Purchase Plus Improvement Mortgage?
By Trisha Isaac, Canmore Mortgage Solutions
Buying a new home is like being on a freeway during rush hour and the signs are in a foreign language—it’s exciting but you’re just trying to keep pace and take the correct exits.
The experience whizzes past and you’ve had to make compromises on your purchases. Maybe you purchased a house with wall colours and flooring from the 1980s, or a wall that’s just in the wrong spot, but that’s ok. You’ll fix them up…one day.
Life takes over and soon there’s no time or money to take care of upgrades. Wouldn’t it be great if you could make those upgrades right after you moved in, so you don’t have to stare at ugly paint for years?
A purchase plus improvement (PPI) program, also known as a renovation mortgage, could be a great fit.
Mortgage insurers and lenders can help qualified home buyers make their new home just right, with tailored improvements, immediately after taking possession of the purchased property. All this can be done with one manageable mortgage payment and with only 5% down.
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 best to work with an experienced mortgage broker to navigate you through the PPI process.
How to Include Renovation Costs into your Mortgage
First, a conditional offer must be made through a lender that offers PPIs and it must be insured by either the Canada Mortgage and Housing Corporation (CMHC), Genworth Canada or Canada Guarantee. After the offer is made, you will acquire quotes from contractors to determine the cost of the renovations that you would like to complete.
Once the quotes are reviewed, the lender and mortgage insurer 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% of the lesser of the following amounts:
the as-improved value, or
the as-is value plus the cost of improvements
Typically, renovations must be completed within 90 days after move in. It is a fast way to turn your new purchase into your dream home, but it does carry upfront costs.
Four Things You Need To Know About Purchase Plus Improvement Plans
The PPI loan will be held in trust by your lawyers until the contracted work is complete. That means you will need a way to pay your contractors or make deposits before you are reimbursed by the lawyers. Some contractors will allow you to pay at completion.
Not all improvements are eligible for the program. For example, appliances would not be included as part of the upgrades.
The best time to look into PPI programs is at initial purchase. If you’ve already purchased your home, there are still options like a Home Equity Line of Credit (HELOC).
Finally, make sure the numbers work for you. Your down payment, insurance premium (if putting less than 20% down), and the monthly payment will increase with a PPI mortgage.
Original Purchase Price: $500,000
Minimum Down Payment: $25,000
Monthly Payment: $2,089.47*
Estimated Improvements: $20,000
New Purchase Price: $520,000
Minimum Down Payment: $27,000
Monthly Payment: $2,168.77*
Monthly Payment Difference: +$79.30
*This is an example only, based on 1.99% 5-year fixed rate, 25-year amortization.
*On Approved Credit
While you can’t backtrack on your home buying journey, you can share your tips with friends and family. So, point them in the right direction—to a mortgage broker—and change the home buying outcome to, “I’m so glad we did that.”