Buy and Renovate Mortgage

Many home-buyers looking at older properties find themselves in a common predicament: they have found a property that suits them, but it needs some costly and immediate upgrades. 

Many buyers add the costs of those immediate renovations into their mortgage, instead of racking up credit card bills or selling investments to pay for the upgrades.  Known as a “purchase plus improvements” mortgage, this type of mortgage covers the sale price of the home, plus any renovations that would increase the value of the property, with as little as 5 per cent down.   

If you’re buying a home but want to add a second storey, finish a basement or redo a kitchen, it can make a lot of sense to add those costs to your mortgage.  That way you can spread your payments over the life of the mortgage and have a cost-effective way to get your dream home.  You can also use your pre-payment privileges to pay the renovation off faster.  The process is quite simple:

Obtain cost estimates for the upgrades

Once you have found a home, you need to get detailed written quotes from licensed contractors on the renovations you plan, outlining the scope and all costs.

Get your appraisal

An appraisal with two separate values will be required: first the value of the property "as is" and the estimated value of the property once the improvements are completed.

Renovation costs are included in your mortgage

Your lender will add the estimated costs of the renovation into your mortgage.  For example, with a 5% down payment, your mortgage broker would apply for 95% of the “as improved” market value, which will be higher than the actual purchase price.  The committed amount of the mortgage will be advanced to your solicitor, who will be instructed to hold back the renovation funds until the work has been completed and inspected.

Complete your upgrades; funds are released upon completion

Once an inspection from an appraiser confirms all work is complete and a copy of the building permit (if applicable) has been received, the balance of the mortgage funds will be released to you to pay for the renovations. There are a few options for carrying your expenditures until the funds can be released.  Some major home improvement retailers offer “no payment” options for up to six months.  Larger contractors may also be willing to finance the project short-term if they see the documentation for purchase plus improvements financing. 

Example:

Purchase price:    $400,000
Improvements:      $40,000
Total mortgage:   $418,000 (95% of $440,000)
$378,000 will be released on closing date. $40,000 will be released upon completion of improvements i.e. improvements are 100% complete and a final inspection has taken place.  

Be sure to consult with a mortgage professional to learn about the full range of options available to you when purchasing a fixer upper.