What is a Purchase Plus Improvements Mortgage?

Finding your dream home is no small task, especially when homes are selling fast. Invariably some homeowners will end up settling for a property that “needs some work”. But this could end up being an opportunity. I’ve found myself binging U.K. architect George Clarke’s renovation series on YouTube and there’s something to be said for buying a “fixer upper” and making it into your dream home with renovations. While it’s rare to find the truly perfect home without building it yourself, putting in some work on a resale home, for example redoing the kitchen or the bathrooms, can go a long way.

What you may not have known is that you can actually get a mortgage that accommodates these renovations, allowing you to plan your budget and borrow an amount that reflects the work you’ll need to do. You may end up happier with the $800,000 home you spent $500,000 to customize to your liking, than the $850,000 home, and you can get a mortgage for either.

What is a Purchase Plus Improvements Mortgage?

A purchase plus improvements mortgage is a flexible mortgage option offered by mortgage insurers in Canada: CMHC, Sagen, and Canada Guaranty. It is a mortgage product that offers up to 95% of the “improved value” of the home, meaning you can get a mortgage that takes into account the increase in the value of the home that comes from renovations. If you plan to buy a home that will be worth a lot more after substantial renovations then a purchase plus improvements mortgage is for you.

The purchase plus improvements mortgage allows you to make a 5% down payment on the first $500,000 of your purchase, and then a 10% downpayment on any amount exceeding that. For example if the home’s cost is $600,000 and you’re planning $30,000 in renovations you would need to put a minimum of (5% of $500,000 = $50,000) + (10% of $130,000 = $13,000) = $635,000 down. In this case you will only be eligible to renovations totalling less then $40,000 however. If your renovations will be more than $40,000 and it’s a rental unit  you’ll need to provide at least a 20% downpayment (which is usually recommended anyway).

From there the lender will lend you the money to fund the purchase of the home, and withhold the extra mortgage for the renovations. Once the renovations are complete the lender will release the remaining funds to you. This means you will still need to have enough cash to complete the renovations but you will get the benefit of having the property reappraised as soon as the renovations are completed.

Finally the lender will order an appraisal done to determine the new value of the home after renovations.

What kind of renovations qualify for a performance plus improvements mortgage?

To qualify for a performance plus improvements mortgage, the planned changes need to be permanent and increase the value of the home. Things like new flooring, windows, light fixtures, painting, and so on. If you’re planning to renovate the kitchen with marble counters and a redone floor, these would likely increase the value of the property. If you’re simply planning on buying a new sectional for the living room, this wouldn’t be something that would qualify you for a performance plus improvements loan.

How do you get a purchase plus improvements mortgage?

You can get a purchase plus improvements mortgage from your mortgage broker who will connect you to the lenders that offer the product. To qualify, as previously mentioned you will need to provide at least a 5% downpayment on the first $500,000 and 10% on any exceeding amount. Or, if your planned changes to the home will cost more than $40,000 a 20% downpayment is necessary. You will also need to provide a detailed list of your planned renovations as well as a quoted price for the work from a contractor. Some lenders may accept a itemized list of materials if you plan to do the work yourself, though you should speak with your lender to be sure.

Can I get a performance plus improvements mortgage on multiple units?

If you’re an investor planning on purchasing multiple units for renovation you can also apply for a performance plus improvements mortgage. If you are looking at a mortgage for 3 or more units, you will need to provide at least 20% of the total equity as a downpayment however. 

If you’re looking to get a performance plus improvements mortgage or you have more questions that we didn’t cover in this article, our mortgage advisors are available to give you 1 on 1 advice that suits your situation.

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