Is a Purchase Plus Improvements Mortgage Right for Your Next Investment

Is a Purchase Plus Improvements Mortgage Right for Your Next Investment?

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As a real estate investor, chances are you’ve walked into a fixer-upper and have seen some potential—but where are you going to get the money to mortgage the home and pay for renovation costs? Enter the Canadian purchase plus improvements loan. This loan allows borrowers to not only finance the cost of the home as-is, but they can also borrow up to ten percent of the value of the home for improvements. With as little as five percent down, you could be well on your way to your first (or next) fix and flip, rental home or other investment property.

Table of Contents - Is a Purchase Plus Improvements Mortgage Right for Your Next Investment?

Here’s what you need to know about purchase plus loans.

What is a purchase plus improvements mortgage?

The purchase plus program allows homebuyers to apply for mortgages plus renovation costs. Buyers and investors can put down as little as five percent, and borrow additional funds to pay for renovations. The supplementary funds are usually limited to a maximum of $40,000, and buyers must show documentation (like a contractor’s quote) to support the need for the extra money. Depending on your lender, they’re also limited to homes under $1,000,000—so places like Vancouver and Toronto are probably out.

This is a great way to jump on the chance to invest in a fixer-upper without having to resort to private lenders and other stopgap funding solutions. If you turn around and sell the home, the improved value should pay off the total mortgage costs—and if you decide to rent it out, you can adjust the rent price to cover monthly mortgage payments.

Where and how to apply

Three major Canadian insurance lenders offer purchase plus improvements mortgages: CMHC, Genworth and Canada Guaranty. Each lender has slightly different rules, so make sure you read the fine print thoroughly. For example, CMHC limits the loans to homes under $1,000,000, while Genworth has a “renovation worksheet” with specific renovation requirements. They’ll also let you borrow more than 20 percent of the home’s value or $40,000—but only in certain cases. Finally, Canada Guaranty requires an appraisal for any renovations of more than 20 percent of the value or over $40,000.

Once you’ve identified your desired property, there are a few steps to follow.

Get a mortgage pre-approval

This will help you and the lender determine the maximum amount of money you’re approved to borrow. We recommend you call LendCity Mortgages for your pre-approval. They fully review your finances, make the best suggestions and maximize your approval.

Identify the renovations you’ll need

Next, decide which renovations you need and how much they’ll cost. If your lender has a list of approved renovations, you’ll need to ensure yours are on the list. You can’t just state “I need $40,000 to renovate the kitchen and the bathroom,” either—you need to get written quotes from contractors. Without them, your lender will not approve the additional funds.

Make an offer

After you get the quotes for your renovations, you’re ready to make an offer on the house. When it’s accepted, you may then provide the acceptance and renovation quotes to your broker. Your lender should approve the mortgage and renovation amount. The down payment should be five percent of the total home price plus the renovations (make sure to include these costs when calculating your down and monthly payments).

Start the renovations

As soon as you take possession of your home, you can begin the approved renovations. Your lender may withhold the additional funds until the renovations are complete. After they’re finished, your broker will send an appraiser out to inspect the home and make sure the improvements were completed at the quoted cost.

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Alert your lender upon completion

Assuming your lender agrees that the improvements were finished according to your plan, they will release the additional funds so you can pay your contractor. Now you’re ready to sell or rent the home.

Which renovations are approved?

Before you get too excited, make sure you understand what you can and can’t use the supplemental funds to improve. The key is that it must add actual value to your home. For example, standard “must-haves” like heating, air conditioning, structural work, improved bathrooms and updated kitchens are usually approved. Personal “must-haves,” like brand-new appliances, electronics and furniture are not considered improvements. (If you can take it with you, it probably won’t qualify.) When in doubt, talk to your lender and broker. They can guide you toward approved renovations.

Getting the most out of your purchase plus improvement mortgage

Using your funds wisely is the key to getting the most out of your loan. Not every improvement is going to add value to your home. Stick to popular, high ROI areas like bathrooms, kitchens or finished attics and basements.

You’ll also need to consider just how much you’re spending on each room, and how much value you expect to get. The more high-value upgrades you add, the more likely you’ll see diminishing returns on those improvements. That is, you might see an 80 percent return on the first $10,000 worth of bathroom upgrades, like new tub and shower, lighting and tiling—but if you keep going, you’ll probably see less actual home value-added.

This is when some knowledge of how to fix and flip a home is particularly important. Focus on the high ROI improvements you absolutely need to sell or rent the home—things like fixtures, plumbing, heating, flooring, additional living space, new roofs and other practical areas. Assuming you’re not planning to keep the home, you don’t need to fix everything. As long as it’s habitable, raises the home’s value and attracts buyers or tenants, you have accomplished your goal.

Is it time to apply for your own improvements loan?

In short, purchase plus improvements mortgages are a great way to dip your toe into the fixer-upper real estate market—or fund the next great property in your portfolio. Talk to your lender and broker about whether these loans are right for your next project.

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Scott Dillingham

Scott Dillingham

I have been investing and lending to real estate investors for nearly 10 years now. After thousands of successful deals between flips, rent to owns, student properties and commercial assets I have developed a deep knowledge of real estate investments and have a passion of sharing this information with the world! If your looking for a lender who specializes in rental property financing you're going to want to connect with me at team@lendcity.ca.