The purchase plus improvements mortgage is one of the BEST untapped opportunities when buying a home in 2024. In our area, it is highly common to come across properties that have excellent general attributes but are significantly dated.
Many homes for sale in the market are in great locations and the structure or ‘bones’ of the property is solid. But the property may not be up-to-date as far as looks or feel. Or, there may be a problem with the property that needs addressing, or upgrades may be necessary for efficiency gains.
In any case, if the home needs a bit of updating or renovations, this is where a purchase plus improvements mortgage could really help out!
This article will show you, not just how the purchase plus improvements mortgage works, but will also provide the best tips and strategies to get the most value out of the program, without any additional stress.
Specifically, this article will discuss:
– How the purchase plus improvements program works in a few steps;
– The 3 main purchase plus improvement programs in Canada, and the unique benefits of each;
– How to get the most out of a purchase plus improvement mortgage;
– How to avoid issues or potential loss from a purchase plus improvement mortgage.
How the purchase plus improvements mortgage works in a few steps:
1. You can get a mortgage approved with as little as 5% down payment, and include some home improvement costs into the mortgage amount.
2. When applying for purchase plus improvements mortgage, the contractor’s quote, for the work to be completed, should be provided upfront with the offer to purchase the home. In other words, before you complete the purchase offer, we need to have a contractors quote outlining the work to be done, and what the cost will be.
The contractor’s quote does not mean we need to specify exactly what materials will be used, but just more generally what will be improved along with the cost.
3. After the purchase is completed, the borrower will need to come up with the funds to complete the improvements. Funds could come from a line of credit, gifted money, or credit on their contractor themselves. Caveat; The bottom line is that you need to figure out how to pay for the improvements at the outset, and then after the improvements are finished, the lender will release the mortgage ‘improvement funds’.
4. If you used credit cards, a contractor’s account, or gifted funds, these could be paid off once the work is complete and the purchase plus improvements funds are released by your lawyer.
5. The work typically needs to be completed within 90 days, but exceptions can be made.
The 3 main purchase plus improvement programs in the Canadian market and the unique benefits of each.
The importance of these insurer programs is that Banks and mortgage lenders will often approach these back end mortgage insurers when approving your mortgage. You don’t see these mortgage insurers, because the lender pays them directly (unless your mortgage is less than 20% down payment). But because such a high percentage of mortgages are ‘back end insured’, it can be helpful to know what purchase plus program options are available to your Bank or lender, and the flexibilities and benefits that these programs offer…
CMHC Purchase plus rules:
Available for small or large scale improvements and new home construction.
Improvement financing available for up to 95% of the ‘as improved’ value of the home. i.e. 5% down.
Improvement costs need to be less than or equal to 10% of the as improved value of the home.
‘As is value’ is defined by the CMHC as ‘the market value of the property after improvements’. Market value would be determined by an appraiser after the improvements are complete.
Available for homes under $1,000,000.
Genworth Purchase Plus rules:
Must adhere to the ‘Genworth Renovation Worksheet’.
Typically, the improvements need to be less than $40,000 or 20% of the purchase price of the home. However in some cases, the amounts can be higher if the lender allows for it.,
Allows for a higher Total Debt Service Ratio of 44%, than CMHC maximum Total Debt Service of 42%.
Canada Guaranty Purchase Plus rules:
Lending is based on either the purchase price or the improved value of the property: whichever is less. PLUS ‘direct costs related to improvements’.
An appraisal is needed for any improvements more than 20% of the ‘as is’ value of the property, or $40,000.
How to get the most out of a purchase plus improvement mortgage:
Although the purchase plus improvement mortgage can be used for many things, such as upgrading a furnace or a roof, these types of improvements may not add as much to the appraised or market value of the home.
An appraiser will not typically value a new roof, for example as higher than the cost to install the new roof. We have seen these kinds of ‘at par’ or even lower valuations in other areas too, such as the installation of new gas piping.
In some cases, you may want or need to use the purchase plus improvement mortgage program to make a repair to a property you are buying for safety or reasons of general essential upkeep.
However, where repairs are not the concern, the following shortlist is areas of improvement that not only equal the cost of the improvement but may potentially be valued higher by an appraiser than the cost of the work.
Kitchen: New cabinetry, countertops, sinks and faucets, flooring, paint and backsplash.
Bathrooms: New toilet, paint, flooring and vanity.
Basement: Finished or partially finished including flooring, drywall, mudding and paint, ceiling and lighting.
More specifically, when looking at these kinds of high-value upgrades, there is a ‘diminishing rate of return’ for improvement costs in these areas.
For example, the first $10,000 spent on a kitchen may generate an additional $5,000 in improved market value (totalling $15,000 in value from the upgrades), whereas the next $10,000 spent on the same kitchen may result in an additional $2,500 in improved value. In other words, in this example, you got more bang for your buck on the first $10,000 spent on the kitchen than the next $10,000 spent. Eventually, the dollar for dollar money spent on upgrades would be equivalent to the value realized on the upgrades. Every situation is different.
The diminishing rate of return is very important when upgrading a home or using the purchase plus improvements program and the key thing to understand if you want maximum improved value is:
(1) Spend the least amount of money, (2) for the best looking upgrade, (3) at a reasonable quality.
How to avoid issues or potential loss from a purchase plus improvement mortgage:
Along the same lines as the information above, the other side of the coin is avoiding situations where the market value of the improvements may actually come in as less than the cost of improvements.
A $1000 lighting fixture will not likely get you any more market value than a $200 lighting fixture. The $500 faucet will not likely get you any more market value than the $150 faucet. The list goes on…
The point is, using luxury items with purchase plus improvements program may be nice, and may still be worth it for you by far. But the higher-end upgrades will not likely result in the most market value realized from the completed work.
At the furthest end of the spectrum is a property that is ‘over improved’ for the neighbourhood that it is in. This happens when a home is upgraded far beyond any other home in the neighbourhood, and other sales in the area do not support the value of the home that has been upgraded.
There is of course nothing wrong with upgrading a home with more luxury items if this has meaning to you, however, if you are looking at maximizing the value of your purchase plus improvements mortgage (or for any renovation project) then installing lower-cost fixtures or upgrades, that look good and with reasonable quality, should help you realize an optimal return.