Have you bought a home that needs renovations? Don’t panic, we will help you pay for the renovations only with one convenient mortgage with 5% down!
Purchase Plus Improvements is for clients looking to buy a new home that has potential but still needs TLC. With this program, you can make renovations immediately after owning your home and your costs for that will roll into one trouble-free mortgage.
- Existing properties or new construction
- Maximum 4 units and at least one of them working as the main residence
Acceptable Loan Purpose
- Available for 30 years
- Buying transactions to 95% or refinances to 80% LTV
- First Step: You must have a clear conception of the needed renovations in your new home and have an idea how much they will cost you.
- Second Step: True North Mortgage can give you a permission based on the house “as-is”. After that, they give you the exact price quotes for the renovations. The quotes must precisely say the work that needs to be complete so make sure of it.
- Third Step: TNM will revise the mortgage permission to add the price of the renovations.
- Fourth Step: You own the home now and can start with the renovations. Anyone can do the work on the condition that it is a perfect job.
- Fifth Step: When the work is finished, the bank send a representative to make sure that everything is under control with the renovations.
- Sixth Step: The money is yours. The lender will instruct your lawyer to release the money.
The mortgage can realize your renovations
Let’s say the house is in perfect condition, situated in a good neighbourhood and even it is pricey, you feel you can bear the cost.
But what if the house has a terrible bathroom from the 1970s? The old bathtub, leaky taps, and broken ceramic tile, you will face additional expense that didn’t count in the original budget.
What are your options?
You can always walk away from that house and find something new you can afford. The complete bathroom renovation may cost up to $15,000 so you will need to take an additional debt. You must carefully think if you want to do that.
A line of credit is another alternative since they with it you can quickly get a cash. However, not always a line of credit is the smartest choice. According to David Chilton, the worst choice are “a line of credit and a home renovation”, explaining that the renovation will be a never-ending cycle.
Finally, you can apply to the PPIP – Purchase plus improvements program, known also as high-ration, renovation, or improvement mortgage. With this option, you will cover the house’s sale price and all the renovations that could raise the cost of the property.
With the PPIP, the homebuyers can benefit from the low-interest rates linked with a mortgage and pay one sum monthly payment.
However, this program has a few steps – the first is to make the buying offer provisional on getting permission for the mortgage program. The second step is to get the quotes from a contractor so you can finalize the price for the renovations.
Then, the Canadian Mortgage and Housing Corporation (CMHC) approves a loan of 95% of the ‘as improved’ worth of the home, providing the money you are putting into the home improves the worth.
Then, the bank sends a representative to confirm the improvements you requested are completed as needed. After making sure everything is complete, the inspector sends a report to the bank so they give the money to the client.
The lender requires quotes to release the funds, but some lenders make exceptions for minor renovations. The inspection reports cost from $100 to $200.
The PPIP offers more advantages than the traditional line of credit.
Tina Tehranchian CFP financial advisor at Assante Capital Management Ltd clarifies the banks usually give a line of credit of 80% of the property’s market value, while the PPP/CMHC-insured mortgage goes up to 95% so the homeowners who got 5% of the down payment to buy the desired home.
However, she adds that high-ratio mortgages have certain disadvantages and are not the right choice for everyone. People who look to obtain 65% of the buying price plus improvement cost have to pay a 0.50% premium, while those who want more than 90% have to pay a 2.75% premium on the complete loan sum.
If someone looks for a loan on the lower end of the scale for paying the premium, this does not make sense considering most financial institutes gives a line of credit of 75% of the home value.
This program is inconvenient for business owners whose cash flow fluctuates. To these homebuyers, the line of credit alternative lets them pay the loan more rapidly than on a mortgage.
Another disadvantage with the PPIP is they tempt the buyers to take more money than they can afford.
If you’re looking for a new home, you might find that the home needs renovations. One way to help home buyers with renovations is with a mortgage that only requires around 5% down.
This mortgage is called the Purchase Plus Improvements Mortgage and this is for those that want to buy a home which needs a few renovations. The mortgage will allow you to take possession of the home and then have the renovations rolled into your mortgage.
- Refinances up to 80% LTV or purchase transactions up to 95%.
- Up to 30-year
Properties That Are Eligible
- Up to four units and at least one that is occupies as the principal residence.
- Existing property or new construction.
- You must find a home and have a good understanding about the renovations that need to be done and have a general idea of the costs of the work.
- You can get approved for the mortgage on the house “as it is.” You get firm price quotes on the work that must be completed. The quotes should specifically state the work that needs to be done.
- The mortgage will be revised to include the cost of the renovations.
- You take possession of the home and then begin renovations. The work can be completed by anyone as long as the work is of quality.
- Once work is done a representative is sent from the bank to ensure the work was completed as requested.
- Your lawyer then instructs the lender to release the funds for the renovations.
The Mortgage Can Make Renovations Happen if You Want to Buy a Home
You find a home you really like, and it has everything you want, and you feel like you can fit the mortgage into your budget. The main problem is that one room is outdated and needs a lot of work. The work required puts the potential home buyer out of their current budget.
In this case, you have a few options:
- You can go and find a new home as a new renovation can be quite costly.
- You could buy the home and take on the added costs of renovations with a loan or other debt.
- A line of credit could be obtained but some experts feel that a line of credit isn’t the best way to go. Those that get credit may see it as easy money and as they renovate one room, they may decide to renovate another room so it matches the new room, and this just increases their debt load.
PPIP Or Purchase Plus Improvements Program
This is also referred to as a high-ration mortgage and it covers the cost of the home as well as the renovations that would be done to increase the home value. The program allows the home buyer to take advantage of low-interest rates and then pay one monthly payment for the home and renovations. There are a few steps to get the PPIP:
- The purchase is conditional on getting approved for the renovation mortgage program.
- Quotes need to be obtained from a contractor. CMHC or Canadian Mortgage and Housing Corporation will approve a loan which is up to 95% of the improved value of the property as long as the funds that into the home improve the actual home value.
- Renovations can’t be just cosmetic. The renovations need to be part of a larger project like changing the kitchen, flooring, or bathroom.
- The bank will send an inspector to ensure that the list of requested improvements has been done in a sufficient way. The report is sent back to the bank and if everything is approved then the finds are released.
- To get the lender to release funds, quotes are usually required. Some lenders will make exceptions if improvements are small. It can cost around $100-$200 for an inspection report.
- The PPIP can often be more beneficial than a regular line of credit
Banks will give a line of credit up to 80% of the property based upon the market value. The CMHC/PPP mortgage goes up to 95% of the property that’s been approved. This can help those that can only put 5% down for the home they want to renovate.
Disadvantages of The Purchase Plus Improvements Mortgage
There are a few disadvantages to high rate mortgages as these aren’t the right choice for everyone. For those that want to obtain about 65% of the home purchase price plus the cost of the improvements must pay a 0.50% premium. Those that want more than 90%, must pay 2.75% of the loan total.
For those on the lower end of the scale to pay a premium such as this might not be the best choice as many financial institutions offer credit lines that are up to 75% of the home value. If this is the maximum that they need, they may be better off with this as there is no premium with CHMC.
The PPIP might not make sense for those that have cash flow which fluctuates like a business owner. To these sorts of borrowers, a line of credit can help them pay down a loan in less time when compared to a mortgage if they have financial discipline. A line of credit can also be good when times get through as you can just revert to paying the minimum on the payment when things slow down for you.
Another downside is that is that while it is easier to qualify for a PPIP, you need to make one monthly payment, and this might be too high of a financial hit for you to pay for every month.
There are upsides as well as downsides to the Purchase Plus Improvements Mortgage. You will need to speak to a financial planner to determine your exact needs and whether or not this plan will work for you.