Purchase Plus Improvements: a Renovation Mortgage

By Kerri-Lynn McAllister, Ratehub.ca
Special to WalletPop Canada

What do you do when you've found a great home to purchase - it meets almost every point on your checklist - but it's got that one deal breaker, a 60s style bathroom or an equally outdated kitchen?

Well, it might not be as bad as you think (the situation, not the linoleum, mind you). You could always look into an unsecured line of credit, or, better yet, roll the renovation into your mortgage. The CMHC, the leading mortgage insurance agency in Canada, will now approve up to 95% of the 'improved' value of a home provided the funds do in fact improve the value. This is known as the Purchase Plus Improvements Program (PPIP).






The advantage of the PPIP over a line of credit is that there will not be the temptation to spend or 'over-renovate' that often accompanies a revolving credit line. Also, home buyers can take advantage of the historically low mortgage rates we have been experiencing as of late.

Jason Friesen of Toronto's Calum Ross mortgage team says the PPIP is an 'ideal option for first-time buyers who typically have a smaller down payment and cannot afford to put money down on a house and pay for the renovations they desire.' Buyers can borrow up to a maximum of 10% of the improved value of a renovated home.

Let's look at example to bring the PPIP to life.

Say you want to purchase a property at a market value of $300,000 requiring $30,000 worth of renovations.
$300,000 + $30,000 = $330,000

To keep things simple, let's assume the cost of the renovations directly increases the value of the home by the same amount ($30,000). If the value added were to be less than the cost, you can borrow up to 10% of the improved value.

At the time of closing, you will have to put in a down payment of at least 5% of the price of the property plus the added value due to renovations. So, in this case, it would be $16,500 (5% of $330,000).

The caveat
Certainly, there are some restrictions to the program.
1. Renovations cannot be simply cosmetic. To be eligible, the renovation needs to be a permanent house fixture that adds value to the property, and home appliances do not count. A broken furnace would not count either, as fixing it would not add value to the property. Similarly, general maintenance would not be accepted.
2. You will need to put up the renovation costs initially.After the quote provided by your contractor has been approved by the CMHC, the renovation funds are held in your lawyer's trust account. The funds are released only after the renovations have been completed.
3. You will want to ensure your contractor over-quotes rather than under-quotes the expected cost of the project.With a more conservative quote, any funds remaining can be put back towards your principal. On the other hand, coming up short of funds is a less desirable situation.
Note that you can submit an offer conditional on being accepted by CMHC for the program. The worst case scenario is that CMHC may reject your proposal; however, this is unlikely if your renovation is a valid one.

Consult a mortgage professional
Negotiating a mortgage Plus Improvements can get complicated. It is advisable to consult a good mortgage broker to guide you through. After all, the opportunity to roll your renovation into your mortgage and inject your own style into your property may be too good to pass up.